Economics 201, Witte, Thursday, September 22, 2005
No TA section this week, but we will announce how to sign up for them soon.
Opportunity Costs and Production Possibilities Frontiers
Opportunity Costs, Marginal Analysis, and Double Majors
What does efficient resource allocation mean?
Vilfredo Pareto (1848-1923) came up with a very uncontroversial definition.
A change in resource use so that we can get more of
something without giving up any of the other things we enjoy.
There is no way to change resource use so that we get more of
one good and just as much of everything else.
No Pareto improvements are
(24, 53) is a Pareto improvement over (21, 53), and (24, 51) and (20, 52).
(24, 53) is Pareto non-comparable to (25, 3).
A Pareto ranking isn’t possible here.
Production Possibilities Frontiers (PPF) – Given fixed resources and technology, what are the Pareto
efficient combinations of things we can produce?
Guns and Butter – Traditional example
Military goods, consumer goods, investment goods, leisure, etc. – 3 or more dimensions
possible, but very hard to draw more than two.
How curve shifts
Change in total resources
Change in resources for producing one good
Change in overall useful knowledge, technology, productivity
Change in knowledge, technology, or productivity useful for producing one good
Consumption (and defense) spending versus investment spending.
More investment spending creates more productive capital in the future.
More future capital means more factories and jobs, and productive capability.
More investment (thus less consumption) now means a bigger PPF in the future.
Why do PPFs bow outward?
Differentiated relative abilities of inputs.
What if we had the choice of making two goods that are
The PPF would be a straight line.
“Comparative Advantage” – it’s not about a resource being the best at some task, it’s about the
resource having the lowest opportunity cost in terms of what else it could be used for that would be
Example (that is basically an exam question)
Imagine that we manage a farm that has two fields that can be used for growing cotton or rutabagas.
fields are the scarce resource for this problem.
Field A is drier and somewhat better suited for growing cotton; Field B
is nearer the creek and its damper nature is somewhat better suited for growing rutabagas.
Field B with its better