Chapter 2 - Production possibilities. After studying this chapter, you should be able to: Explain the importance of models in economics, describe the production possibilities model, illustrate the use of the production possibilities model, calculate opportunity costs of production,...
Trang 1Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock
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Trang 2Ø Explain the importance of
models in economics
Ø Describe the production
possibilities model
Ø Illustrate the use of the
production possibilities model
Ø Calculate opportunity costs of
Ø Discuss the difference between positive and normative
economics
After studying this chapter, you should be
able to:
Trang 3Ø Models are used in economics and most other sciences to represent reality.
captures the most important features of
something but does not include each and every detail
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& Sons, Inc.
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MODELS IN ECONOMICS
Trang 4Ø Production Possibilities Model Combinations of goods or services that can be produced by an individual, a group, or an entire economy given the resources available and the state of
technology
PRODUCTION POSSIBILITIES MODEL
Trang 5Ø Production Possibilities Frontier (PPF)
produced with a given set of resources and
technology, ceteris paribus
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Production possibility frontier
Trang 6A hypothetic example
Trang 7Ø The production possibilities model shows some important relationships that represent the
choices facing an individual, a firm or an entire economy
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What’s in a PPF?
Trang 8Ø Scarcity and Tradeoffs
Ø Attainable and Unattainable Choices
Ø Efficiency and Inefficiency
represent efficient choices.
represent inefficient choices.
Some important economic relationships
implied in PPF
Trang 9Ø Economic Growth: the ability to produce goods has increased (caused by increased resources)
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Some important economic relationships
implied in PPF
Trang 10Ø Economic Growth: the ability to produce goods has increased (caused by technological change)
Some important economic relationships
implied in PPF
Trang 11Ø Opportunity Cost The slope of the PPF equals the opportunity cost of producing one more unit of the
good measured on the X-axis.
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Some important economic relationships
implied in PPF
Trang 12Increasing Costs and Specialized Resources
Trang 13Ø Absolute Advantage: the ability to produce
something with fewer resources or to produce
more with the same resources as another
producer
Ø Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than another producer
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Absolute & comparative advantage
Trang 14Absolute & comparative advantage
Trang 15Ø For Dan:
The opportunity cost of producing 1 pint of yogurt is
The opportunity cost of producing 1 bagel is 1/5 pint
Ø For Betty:
The opportunity cost of producing 1 pint of yogurt is
The opportunity cost of producing 1 bagel is 1/3 pint
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comparative advantage
Trang 16Ø Because Betty can produce yogurt at a lower
opportunity cost (3B) than Dan(5B), she has
comparative advantage relative to him in
producing yogurt
is lower than Betty ’s (0.33Y), Dan has
comparative advantage relative to Betty in
producing bagels
Gains from specialization & trade
Trang 17Ø Dan will specialize in producing bagels, he will
produce 300 bagels and no yogurt
produce 40 pints of yogurt and no bagels
Ø The mutually beneficial terms of trade is
3B < 1Y < 5B Assuming: 1Y = 4B
e.g Dan trades 100 bagels to Betty at this price, he will
receive 25 pints of yogurt in return.
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Gains from specialization & trade
Trang 18Assuming: 1Y = 4B
Dan trades 100 bagels to Betty at this price, he will receive
25 pints of yogurt in return.
Gains from specialization & trade
Trang 19Ø Normative Economics deals with value
judgments and decisions regarding how things should be
Ø Positive Economics is more objective and
provides descriptions of how things are
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Positive vs normative economics
Trang 20The three basic economic questions regarding
resource allocation are:
Ø For whom to produce?
three basic economic questions
Trang 21Copyright © 2013 John Wiley
& Sons, Inc.
21
Which of the following is true of production possibility frontiers (PPFs)?
A The slope of the PPF reflects the
opportunity costs of producing different combinations of two goods.
inside or outside the PPF, ceteris paribus.
C Points inside the PPF boundary are
attainable and efficient.
D Only points along the frontier line are
attainable and efficient.
Trang 22• Production possibilities model
• Production possibilities frontier