Appendix 1 Homework Numbers 2, 6, 8, and 10

Chapter 2 Efficiency and Allocation in the Global Economy

Law of Increasing Opportunity Cost As we devote more and more resources to the production of one good, the opportunity cost of producing that good increases.  Illustrated by moving along a concave (bowed out) PPF  Resources are specialized Not well suited for all goods

Figure 2.2 Shifting Resources and Increasing Opportunity Costs

Modeling Economic Growth Two things SHIFT the PPF  New resources  New technology What happens if there is not a shift??

Figure 2.3 Physical Capital and Shifts in the Production Possibilities Frontier

Efficiency and Equity Production of the goods and services that the economy values most. How decide?  Look at the trade-offs involved in producing different goods.  Best outcome Marginal benefits = Marginal costs

Figure 2.6 Choosing a Point on the Production Possibilities Frontier

Individual Choices and Gains from Trade The PPF model can also be used to analyze trade between individuals and between nations.

Absolute and Comparative Advantage Trade is based on the principle of comparative advantage.  Comparative Advantage—being able to produce at a lower opportunity cost than someone else.  Absolute Advantage—being able to produce more than someone else.

Producing and trading Two people: Elizabeth and Brian Each produce two goods: Bread and Apples Elizabeth  10 loaves of bread and 10 apples Brian  5 loaves of bread and 15 apples Elizabeth Apples Elizabeth Bread Brian ApplesBrian Bread

Comparative Advantage Should both produce apples and bread or should they specialize? What does specialize mean?  Produce the good that you do best  Produce at a lower costs than other person(s) can  Called comparative advantage  Looks at opportunity cost What was that? What you have to give up Give up less?? Have the comparative advantage

What are the opportunity costs? Elizabeth  If decide to only produce bread how many apples does she give up ? 10 units  If decide to only produce apples how much bread does she give up? 10 units Opportunity Costs  10 Bread = 10 Apples  1 Bread = 1 Apple Elizabeth Apples Elizabeth Bread

What are the opportunity costs? Brian  If decide to only produce apples how much bread does he give up? 5 units  If decide to produce only bread how many apples does he give up? 15 units Opportunity Costs  5 Bread = 15 Apples  1 Bread = 3 Apples  1/3 Bread = 1 Apple Brian Apples Brian Bread