Learning Objectives: The Economic Problem LO4: Understand why trade results in economies being more productive LO5: Explain the three fundamental questions and the four ways economies can be organized LO6: Use the production possibilities model to explain choice, opportunity cost, efficiency, and unemployment CHAPTER 1 1-1© 2012 McGraw-Hill Ryerson Limited

Efficiency Productive Efficiency -Production of an output at the lowest possible average cost Allocative Efficiency -Production of that combination of outputs that best satisfies consumers’ demands 1-2© 2012 McGraw-Hill Ryerson Limited LO4

Trade -Voluntary trade benefits both parties -The more trade, the greater the benefits -Applies to individuals as well as to nations 1-3© 2012 McGraw-Hill Ryerson Limited LO4

Benefits of Trade 1-4© 2012 McGraw-Hill Ryerson Limited LO4 Maximum Output: BreadPlows Athens20OR10 Sparta10OR20 Without Trade: BreadPlows Athens10AND5 Sparta5AND10 Total Output15AND15

Benefits of Trade 1-5© 2012 McGraw-Hill Ryerson Limited LO4 Maximum Output: BreadPlows Athens20OR10 Sparta10OR20 With Trade: BreadPlows Athens20AND0 Sparta0AND20 Total Output20AND20