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