1. Principles of Microeconomics Shomu Banerjee
2. Production possibilities
Emory University
Spring 2013

2. Opportunity costs
Definition: The opportunity cost of making a choice is
Ex.: An Emory professor who makes $100,000 a year decides to quit teaching and open a restaurant instead. What is his opportunity cost?

3. Opportunity costs cont’d
Opportunity cost = Explicit costs + Implicit costs Ex.: You fly Airtran from Atlanta to NYC for $89. It takes you 5 hours in all. Your wage is $10/hr. What is your opportunity cost?

4. Production Possibilities Frontier
A1 • A country produces guns or butter A2 • Technology ◊ 1 worker produces 1 unit of butter ◊ 2 workers produce 1 gun A3 • Endowment ◊ There are 10 workers in all

5. Attainable w/ full employment
PPF model cont’d
Guns
Butter 5 10
Attainable w/ full employment
PPF
Unattainable
Attainable

6. PPF model cont’d Guns Butter 5 105 10
Opportunity cost of 1 unit of butter =
Opportunity cost of 1 gun =
PPF

7. PPF model cont’d Innovation: 1 worker produces 1 gun Guns Butter 5 105 10
Opportunity cost of 1 unit of butter =
Opportunity cost of 1 gun =
New PPF
Old PPF

8. PPF model cont’d More resources: There are 20 workers in all Guns
Butter 5 10
So there are 2 ways in which we make previously unattainable combinations attainable: •
New PPF
Old PPF
Unattainable

9. Increasing opportunity cost
Opportunity costs A
Guns
Butter 5 10 B
A to B =
B to C =
C to D =
D to E =
E to F = C D E F

10. Increasing opportunity cost
Guns
Butter 5 10 B C D E F

11. Basis for trade
Absolute advantage:
Comparative advantage:

12. Absolute/Comparative Advantage
Peru can produce 1 unit of wool with 2 units of labor and 1 unit of corn with 4 units of labor
The US can produce 1 unit of wool with 1 unit of labor and 2 units of corn with 1 unit of labor
Opp. cost of wool in the US: 1 wool =
Opp. cost of wool in Peru: 1 wool =

13. Specialization and Trade
Corn
Corn
Peru US 10 10 3
(3, 7)
TOT (= CPF) 5 5
TOT (= CPF)
(3, 3) 3 5 10 5 10 3 3
Initial
Final
Specialize
Wool
Initial
Final
Specialize
Wool
Peru

14. Incomplete specialization
Corn
Corn
Peru US 10 10
(1, 8) 2
(3, 6) 5
TOT (= CPF) 5
TOT (= CPF)
(2, 3) US 2
(4, 1)
Peru 5 10 40 2 2 5
Initial
Final
Specialize
Wool
Initial
Final
Specialize
Wool