Microeconomics 2 John Hey. Chapter 13: totals In totals space, areas do not mean anything. slopes do – the corresponding marginal. Think of the units.

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Presentation transcript:

Microeconomics 2 John Hey

Chapter 13: totals In totals space, areas do not mean anything. slopes do – the corresponding marginal. Think of the units.

Chapter 13: marginals In marginals space, slopes do not mean anything. areas do – the corresponding total. Think of the units.

Chapter 14 Production possibility frontiers. Case 1: linear technology... two people. Case 2: non-linear technology... two firms and two inputs.

Case 1 Two individuals A and B. Two goods 1 and 2. Working time is fixed. Individual A can produce 120 units of good 1 or 60 units of good 2... or any linear combination, for example 60 of good 1 and 30 of good 2. Individual B can produce 20 units of good 1 or 40 units of good 2... or any linear combination, for example 10 of good 1 and 20 of good 2. Let’s go to Maple.

Case 2 Two firms A and B. Two produced goods 1 and 2. Two inputs 1 and 2. Firm A has Cobb-Douglas technology with parameters a=0.56 and b=0.24. Firm B has Cobb-Douglas technology with parameters a=0.48 and b=0.32. The quantities of the two inputs in society are100 and 100. Society has to allocate the inputs to the two firms. Let’s go to Maple.

Chapter 14 Summary In a linear society the production possibility frontier is concave (though not smoothly so). In a non-linear society with decreasing returns to scale the production possibility frontier is concave.

Chapter 14 Goodbye!