Macro E Notes Jan 28 Chapter 2 ~ Trade-offs, comparative Advantage, and the Market System Trade-off: The idea that because of scarcity, producing more of one good or service means producing less of another good or services. Production Possibilities frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. The PPF is an economic model used to analyze the trade-offs that individuals, firms, and countries face when deciding how to employ their scarce resources. EXAMPLE (handout) Combinations outside the PPF are unattainable, given the available resources and current technology (scarcity). Combination inside or on the PPF are attainable, given the available resources and current technology. Combinations inside the PPF are inefficient because some resources are not being used (unemployment), so it is possible for the economy to produce more of one good without producing less of the other. In Contrast: Combinations are efficient because the maximum output is being obtained from the available resources and current technology, so it is impossible for the economy to produce more of one good without producing less of the other (trade off). Opportunity cost: the highest –valued alternative that next-best alternative be given up to engage in an activity. Every choice has an opportunity cost because every choice has a next-best alternative. Jan 30 Chapter 2 In our PPF example, Near can use all its available resources and current technology to produce either 200 laptops per week or 400 tablets per week. (Chapter 2 examples) 200L=400T, so 1L=2T and 1T=0.5 L ? ? ? ? 100 Near’s marginal opportunity cost of 1 L is constant at 2T, meaning the for Near to produce 1 more L, it must give up producing 2T; inversely, Near’s marginal opportunity cost of 1 tablet is constant at one-half of a laptop, meaning that or Near to produce 1 more tablet, it must give up producing one-half of a Laptop. In the same example, Far can use all its available recourses and current technology to produce to produce either 220 L per week or 1100 tablets per week. 220L=1100T, so 1L =5T and IT = 0.2 L ( ? ? ) Far’s marginal opportunity cost of a laptop is constant at 5 tablets, and Far’s marginal opportunity cost of 1 T is constant at one-fifth of a laptop. Constant: A bowed-out PPF illustrates increasing marginal opportunity cost: as the economy increases its production of one good in one-unit increments, it must decrease its production of the other good by larger and larger amounts (P44 numerical example).