Chapter 2

 What you give up to do something else.  What you do not do when you choose to do something else.  The economic value of your next-best alternative  May be non-financial Chapter 22

 Direct Costs  $ that leaves your pocket  Tuition  Books  Gas  Opportunity Costs  $ that doesn’t go into your pocket  Wages  Quality time  TV Chapter 23

 The different combinations of final goods and services that could be produced in a given period of time with all available resources and technology.  Each point on the production possibilities curve depicts an alternative mix of output. Chapter 24

 Production possibilities illustrates two essential principles.  Scarce resources  Opportunity Costs Chapter 25

AwakeAsleep Chapter 26

Awake Asleep Chapter 27

CornWheat Chapter 28

Wheat Corn Chapter 29

Goods $10T $12T Services Chapter 210 $4T $10T

 10 Acres  You can grow tomatoes or watermelon Chapter 211

Tomatoes Watermelon Chapter 212 B A C

 A. On the curve - efficient  B. Inside – inefficient  not using all available resources  C. Outside the curve - impossible Chapter 213

 An outward shift in the Production Possibilities curve  you can & do produce more than before. Chapter 214

 The ability to produce a good or service at a lower opportunity cost than someone else. Chapter 215

 The ability to produce a good or service at a lower opportunity cost than everyone else. Chapter 216

Sink RepairsTax Filing Ashley2 hrs. 8 Barry8 1 Chapter 217

Sink repairs Tax Filings Chapter 218 Ashley Barry

 Ashley has the comparative advantage for sink repairs.  Ashley only has to give up doing ¼ of a return in order to fix a sink, where Barry would have to give up doing 8.  Barry has the comparative advantage in filing taxes.  Barry only has to give up 1 / 8 of a sink repair to do a tax return. Ashley has to give up taking 4 sink repair jobs to do her taxes. Chapter 219

 Ashley has the comparative advantage for sink repairs.  Barry has the comparative advantage in filing taxes.  Ashley charges $100 to fix a sink  Barry charges $200 to do a tax return Chapter 220

 For Ashley to do her own taxes, she would give up the opportunity to fix 4 sinks.  She would give up $400 of sink jobs to keep from paying $200 to Barry  Barry would have to give up 8 tax jobs to take the time to fix his sink.  He would give up $1,600 of tax jobs to avoid paying Ashley $100 Chapter 221

 Ashley should let Barry file her taxes  Barry should call Ashley for all his plumbing needs  Even if it isn’t about the money  instead of spending 8 hours doing her taxes, Ashley could spend 2 hours repairing a sink to make more- than-enough money to pay Barry, then take the rest of the day off! Chapter 222

 Cathy can do a tax return in 30 minutes, and a sink repair in 15 minutes.  She is faster than both people, for both jobs. Chapter 223

 For sinks:  Ashley has the comparative advantage over Cathy. Cathy has the comparative advantage over Barry.  For Taxes:  Barry has the comparative advantage over Cathy. Cathy has the comparative advantage over Ashley. Chapter 224

 Although faster at both jobs, Cathy does not have an absolute advantage in either job!  Cathy has to give up 2 sinks to do a tax return. Barry only has to give up 1 / 8 of a sink  Cathy has to give up ½ of a tax return to fix a sink, but Ashley only has to give up ¼ of a tax return. Chapter 225

 If Ashley, Barry, & Cathy were the only 3 people in town:  Ashley has the absolute advantage in sinks  Nobody gives up less than her  Barry has the absolute advantage in taxes  Nobody gives up less than him Chapter 226

 Cathy can do Both faster than everybody. She can make more money than either. This is a good thing, even if it isn’t “absolute advantage”  Which should she do for a living?  16 $200 = $3,200/day  32 $100 = $3,200/day  Which makes her happier? Chapter 227

 Some people find themselves washed ashore on a pacific island… Chapter 228

 10 Acres  Can only grow coconuts & bananas  Can only get 1 tree per acre Chapter 229

Coconuts Bananas Chapter 230

 10 Acres  Can only grow coconuts & bananas  They need 1 acre for each coconut tree, or 2 acres for each banana tree they plant Chapter 231

Coconuts Bananas Chapter

 Our Friends:  Plant: 5 bananas & 5 coconuts  Eat: 5 bananas & 5 coconuts  The Neighbors  Plant: 3 bananas & 4 coconuts  Eat: 3 bananas & 4 coconuts Chapter 233

 Our Friends:  Plant: 10 bananas  Eat: 5 bananas & 5 coconuts  Or: 6 bananas & 6 coconuts, or 6 bananas & 5 coconuts…  The Neighbors  Plant: 10 coconuts  Eat: 5 bananas & 5 coconuts  Or: 4 bananas & 4 coconuts, or 4 bananas & 5 coconuts… ▪ Depends on how they negotiate Chapter 234

 Before Trade:  8 bananas & 9 coconuts  After Specialization & Trade:  10 bananas & 10 coconuts  Using the same 20 total acres! Chapter 235

 Lower Prices  More of each product  More choice  Easier work situation  World peace  More Efficient  Better for the environment Chapter 236

 Loss of jobs  Possible loss of money if not fair  Dependency on someone else  Threat to national security? Chapter 237