Unit 1 in 35 minutes! Review of production possibilities curves, comparative advantage, and the circular flow of the economy 1

The Production Possibilities Curve All models have simplifying assumptions: Available supply of resources is fixed in quantity and quality at this point in time. Technology is constant during analysis. Economy produces only two types of products.

Opportunity Cost - Constant A PPC with a straight line has a constant slope, and therefore, constant opportunity cost.

Opportunity Cost - Increasing Question for Students: If we want more bulldozers, and if we were controlling this economy, what would we need to do? We would need to move some pizza makers (and capital, and natural resources) to bulldozer production. Has anyone ever had a bad pizza or a great pizza? Is it safe to say that not all pizzas are created equal? Then is it also safe to say that not all pizza makers (the labor) are created equal? Are some pro athletes better than others? Are some acres of land more fertile (for growing food) than others? Are all laptop computers equal, or are some faster than others?   The point is that resources are not created equal. Can the students agree that some units of labor are better pizza makers than others? If that’s the case, then let’s redraw the PPC. Redraw the PPC with a concave shape. You don’t need numbers. There is something that economists call the “Law of increasing opportunity costs” 1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost. 2. The more of a product produced the greater is its (marginal) opportunity cost. 3. The slope of the production possibilities curve becomes steeper (going left to right), demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin. Why? 1. Economic recourses are not completely adaptable to alternative uses. 2. To get increasing amounts of Bulldozers, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing Pizza in a restaurant may not do well as heavy equipment builders. A pizza oven is a piece of capital equipment that is not very adaptable to building Bulldozers.

Economic Growth Economic growth Expansion of the economy’s production possibilities Availability of resources (land, labor, capital, entrepreneurship) Technology Economic growth means an expansion of the economy’s production possibilities: the economy can produce more of everything.  

Economic Growth Draw a new PPC that has shifted outward in a roughly parallel manner. How could this happen? When factors of production expand in quantity or quality. A bigger or a more educated/skilled work force. When technological advances are occurring. Technology always advances, we don’t forget our technology.  

Assume it costs you $50 to produce 5 t-shirts Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?

Or . No more money…

What is the per-unit opportunity cost for each SHIRT in terms of HATS given up?

What is the per-unit opportunity cost for each HAT in terms of SHIRTS given up?

100 pizzas or 200 burgers 20 pizzas 200 burgers

Ronald’s OC for 1 pizza in terms of urge given up? Ronald’s OC for 1 burg in terms of pizza given up? 20 pizzas 200 burgers

Papa’s OC for 1 pizza in terms of urge given up? 100 pizzas or 200 burgers Papa’s OC for 1 pizza in terms of urge given up? Papa’s OC for 1 burg in terms of pizza given up?

1 burger costs 1/2 pizza 100 pizzas or 200 burgers 1 pizza costs 2 burgers 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 20 pizzas 200 burgers

1 burger costs 1/2 pizza 100 pizzas or 200 burgers 1 pizza costs 2 burgers 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 20 pizzas 200 burgers

1 burger costs 1/2 pizza 100 pizzas or 200 burgers 1 pizza costs 2 burgers 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 20 pizzas 200 burgers

COMPARATIVE ADVANTAGE 1 burger costs 1/2 pizza 100 pizzas or 200 burgers 1 pizza costs 2 burgers COMPARATIVE ADVANTAGE 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 20 pizzas 200 burgers

100 pizzas or 200 burgers ABSOLUTE ADVANTAGE 20 pizzas 200 burgers

Benefits of Specialization and Trade 20

International Trade USA Brazil Sugar (tons) Wheat (tons) 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 5 10 15 20 Wheat (tons)

Which country has a comparative advantage in wheat? Sugar USA 30 (1W costs 1S) 30 (1S costs 1W) Brazil 10 (1W costs 2S) 20 (1S costs 1/2W) Which country has a comparative advantage in wheat? Sugar (tons) 45 40 35 30 25 20 15 10 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Which country should EXPORT Sugar? Which country should EXPORT Wheat? Which country should IMPORT Wheat?

The US Specializes and makes ONLY Wheat Brazil Makes ONLY Sugar International Trade Trade: 1 Wheat for 1.5 Sugar S W 30 1.5 29 3 28 4.5 27 6 26 7.5 25 9 24 10.5 23 12 22 13.5 21 15 20 16.5 19 18 19.5 17 S W 20 18.5 1 17 2 15.5 3 14 4 12.5 5 11 6 9.5 7 8 6.5 9 10 3.5 USA Brazil Sugar (tons) 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 5 10 15 20 Wheat (tons) The US Specializes and makes ONLY Wheat Brazil Makes ONLY Sugar

International Trade TRADE SHIFTS THE PPC! USA Brazil AFTER TRADE 45 40 35 30 25 20 15 10 5 AFTER TRADE 30 25 20 15 10 5 Sugar (tons) Sugar (tons) AFTER TRADE 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Wheat (tons)

Output: Other goes Over Output Questions: OOO= Output: Other goes Over Answers: Neither Canada Japan CDs Beef

Output: Other goes Over Input Questions: Switch the product amounts. Poof! It’s an Output Question! OOO= Output: Other goes Over Answers Both U.S. (Input Question) France Corn

Practice FRQ

Which country has an absolute advantage in the production of tractors Which country has an absolute advantage in the production of tractors? Explain how you determined your answer. Which country has an absolute advantage in the production of cars? Explain how you determined your answer. Which country has a comparative advantage in the production of cars? Use the concept of opportunity cost to explain how you determined your answer. For Xanadu, what is the opportunity cost of producing one car? If the two countries specialize and trade with each other, which country will import cars? Explain why.

(2 Points For EACH: 1 point answer, 1 point explanation) 10 Points Possible (2 Points For EACH: 1 point answer, 1 point explanation) A. Answer-Xanadu Explanation- Because they can produce more total tractors than Atlantis. B. Answer-Atlantis Explanation- Because they can produce more total cars than Xanadu.

(2 Points For EACH: 1 point answer, 1 point explanation) C. Answer- Atlantis Explanation- Because the opportunity cost for Atlantis to make one car is 1/3 a tractor which is less than then the opportunity cost for Xanadu (1 car =2 tractors). D. Answer- Opportunity Costs is 2 Tractors. No explanation required

(2 Points For EACH: 1 point answer, 1 point explanation) E. Answer- Xanadu will import cars Explanation- Xanadu should not make cars. They should specialize in making tractors and import cars from Atlantis since they have a lower opportunity cost.

Terms of Trade 32

What terms of trade benefit both countries? Pineapples Radios Kenya 30 10 (1P costs 1/3R) (1R costs 3 P) India 40 (1P costs 1R) 40 (1R costs 1P) Kenya wants radios. If the terms of trade for 1 radio is greater than 3 pineapples then Kenya is worse off and should make radios on their own. India wants pineapples. If the terms of trade for 1 radio is less than 1 pineapple then India is worse off and should make pineapples on their own. What terms of trade benefit both countries?

1 radio 1 pineapple 3 pineapples 1 pineapple 1/3 radio 1 radio Radios Kenya 30 10 (1P costs 1/3R) (1R costs 3 P) India 40 (1P costs 1R) 40 (1R costs 1P) 1 radio 1 pineapple 3 pineapples 1 pineapple 1/3 radio 1 radio

Create a chart for each of the following problems. Comparative Advantage Practice Create a chart for each of the following problems. First- Identify if it is a output or input question Second-Identify who has the ABSOLUTE ADVANTAGE Third-Identify who has a COMPARATIVE ADVANTAGE Fourth- Identify how they should specialize 1. Eric gives 2 haircuts or 1 perm and hour. Will gives 3 haircuts or 2 perms per hour. 2. Cory fixes 16 flats or 8 brakes per day. Vilo fixes 14 flats or 8 brakes per day. 3. Marie takes 30 minutes to wash dishes and 1 hour to vacuum the house. Bridgett takes 15 minutes to wash dishes and 45 minutes to vacuum. 4. Americans produce 50 computers or 50 TVs per hour. Chinese produce 30 computers or 40 TVs per hour. Answers Output. Absolute: Will in both Comparative: Eric in haircuts and Will in perms. Output Absolute: Cory in flats. Vilo and Cory share in breaks. Comparative: Cory in flats and Vilo in breaks. Input Absolute: Bridgett in both. Comparative: Bridgett in dishes. Marie in vacuum. Absolute: Americans in both. Comparative: American in computers and China in T.V.s

Circular Flow Model