1. Production Possibility Frontier Comparative Advantages
Economic models
Production Possibility Frontier
Comparative Advantages

2. Production Possibility Frontier

3. Cast away (2000) Limited resources on the island
Limited resources from the plane
Limited time
Limited effort

4. Production Possibility Frontier (PPF)
Resources are scarce  people face trade-offs
PPF illustrates the trade-offs facing an economy that produces only TWO goods

5. Trade-off between production of fish and production of coconuts

6. Production Possibility Frontier (PPF)
If a production point lies inside the frontier, it is feasible but not efficient
If a production point lies on the frontier, it is feasible and efficient
If a production point lies outside the frontier, it is not feasible.

7. How PPF help us understand:
Efficiency
Opportunity cost
Economic growth

8. 1) Efficiency
Recall from Unit 1 that an economy is efficient when there are no missed opportunities—there is no way to make some people better off without making other people worse off.
Here we are talking about no missed opportunities in production—there is no way to produce more of one good without producing less of other goods.
If an economy is producing at a point on the PPF, we say the economy is efficient in production

9. Suppose Tom prefers point B to point A
Efficiency in production is not enough
Suppose Tom prefers point B to point A

10. Efficiency in production & allocation
Efficiency in production: produce as much of each good as it can given the production of other goods
Efficiency in allocation: produce the mix of goods that people want to consume

11. 2) Opportunity cost
Recall that the true cost of any good is not just the amount of money it costs to buy, but everything else in addition to money that must be given up in order to get that good—the opportunity cost

12. Constant opportunity cost:
1 fish=3/4 coconut

13. Increasing opportunity cost

14. Increasing Opportunity Costs
Economists believe that in reality, opportunity costs are typically increasing.
As more of a good is produced, its opportunity cost typically arise because well-suited inputs are used up and less adaptable inputs must be used instead.

15. 3)Economic Growth
Recall that economic growth is the growing ability of the economy to produce goods and services
Economic growth means an expansion of the economy's production possibilities: economy can produce more of everything

16. Growth is shown as an outward shift of the PPF

17. Two sources of economic growth
(1) increases in factors of production
(2) progress in technology

18. Factors of production --resources not used up in production
Land: resources supplied by nature
Labor: workers
Capital: “created: resources such as machines, factories, fishing net in Tom’s case
Human capital: educational and skillsets of the labor force

19. Technological growth Crucial force behind economic growth
In Tom’s case, a technological invention such as a fishing hook or wagon for transporting coconuts would shift his PPF outward

20. Comparative Advantage

21. There are Gains from Trade
There are gains from trade even if one of the trading parties isn’t especially good at anything
Let’s suppose that on the island, another castaway, Hank, is washed ashore

25. Lessons from the model
(1): by agreeing to specialize and provide goods to each other, Tom and Hank can produce more and therefore both be better off than if they tried to be self-sufficient
(2) as long as people have different opportunity costs, everyone has a comparative advantage in something, and everyone has a comparative disadvantage in something

26. Absolute Advantage
An individual has an absolute advantage in an activity if he or she can do it better than other people.
Absolute advantage ≠ comparative advantage

28. International trade
Politicians and the public often question the desirability of international trade, arguing that the government should protect US industries from foreign competition.
Viewing in terms of comparative advantage, economists, however, have a very positive view of international trade.
Look at the following hypothetical example:

32. True or false? Explain.
a. An increase in the amount of resources available to Tom for use in producing coconuts and fish does not change his production possibility frontier.

33. True or false? Explain.
b. A technological change that allows Tom to catch more fish for any amount of coconuts gathered results in a change in his production possibility frontier.

34. True or false? Explain.
c. The production possibility frontier is useful because it illustrates how much of one good an economy must give up to get more of another good regardless of whether resources are being used efficiently.

35. In Italy, an automobile can be produced by 8 workers in one day and a washing machine by 3 workers in one day. In the United States, an automobile can be produced by 6 workers in one day, and a washing machine by 2 workers in one day.
a. Which country has an absolute advantage in the production of automobiles? In washing machines? b. Which country has a comparative advantage in the production of washing machines? In automobiles? c. What pattern of specialization results in the greatest gains from trade between the two countries?

36. Positive vs Normative Economics
Positive economics is the branch of economic analysis that describes the way the economy actually works (description). e.g. How much would that revenue increase if the toll were raised from $1 to $1.50? Normative economics makes prescriptions about the way the economy should work (prescription). e.g. Should the toll be raised, bearing in mind that a toll increase will reduce traffic and air pollution near the road but will impose some financial hardship on frequent commuters?

37. Economists do mostly positive economics, analysis of the way the world works, in which there are definite right and wrong answers and which involve making forecasts. But in normative economics, which makes prescriptions about how things ought to be, there are often no right answers and only value judgments.

38. Positive or Normative Statement?
a. Society should take measures to prevent people from engaging in dangerous personal behavior.

39. Positive or Normative Statement?
b. People who engage in dangerous personal behavior impose higher costs on society through higher medical costs.