Midterm 1

# Summary points on the ppf line efficient resources

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Summary: *Points on the PPF line: Efficient, resources are being used to their best ability

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*Points on the interior of the PPF: Inefficient but attainable *Points outside the PPF: Not attainable -Q: What does the slope of the PPF show? A: If you want more computers, you have to give up an amount of wheat (this is because you must take the labor hours and allocate them to computer instead of wheat). Therefore, the slope of the PPF will show the opportunity cost of computers (how much wheat you have to give up to get a certain number of computers). *The slope of a line equals “rise over run” (change in y/change in x), the amount the line rises when you move to the right by one unit. - Q: What would happen if productivity in one industry increased? (For example productivity in the field of producing wheat increases) -A: The y intercept is going to increase, therefore the slope will become steeper. The effect of this on opportunity cost, is that the opportunity cost of producing wheat increases because now every time you produce more wheat you are giving up even more labor hours for producing computers. Example Two: Q: In which country is the opportunity cost of cloth lower? A: France’s opportunity cost is -0.5, whilst England’s opportunity cost is -1.5, therefore France has a higher opportunity cost of producing cloth, and England has a lower opportunity cost of producing cloth. The Shape of the PPF - The PPF can be a straight line or bow shaped - The shape depends on what happens to opportunity cost as the economy shifts resources from one industry to the other. - If opportunity cost remains constant, the PPF is a straight line. (In our previous example above, the opportunity cost of a computer was always 10 tons of wheat) - If opportunity cost of a good rises as the economy produces more of the good, then the PPF is bow shaped. A PPF is bow shaped if resources are not transferable (for example if the resource was machinery, if you lose less machinery in one field you cannot necessarily use that machinery in the other field because it is not transferable).
At B ....... *Therefore, the PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other. The PPF would also be bow shaped when there is some other resource, or mix of resources with varying opportunity costs (e.g. different types of land suited for different uses). CHAPTER THREE: Interdependence and Gains from Trade *The world is very interdependent: Every day you rely on many people from around the world, most of whom you’ve never met , yo provide you with the goods and services you enjoy. * This chapter looks at the fifth microeconomic principle: Trade can make everyone better off. WHY ARE THERE GAINS FROM TRADE?

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• Spring '13
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