1. Copyright © 2003 Pearson Education, Inc.Slide 1-1 PPF -- the slope of PPF measures the opportunity cost of M in terms of D  Ricardian model -- labor is the only factor of production The production possibility frontier is a straight line because the opportunity cost of M in terms of D is constant.  H-O model -- the addition of other factors of production changes the shape of the PPF to a curve. Because of diminishing returns, PPF is a bowed-out curve instead of a straight line.

2. Copyright © 2003 Pearson Education, Inc.Slide 1-2 PPF-Constant opportunity costs As the production of Q C expands,the output of Q W falls, but as a constant rate. QWQW QCQC 1 1

3. Copyright © 2003 Pearson Education, Inc.Slide 1-3 PPF-increasing opportunity costs For each additional unit of Q C produces in the economy, the amount of Q W produced falls by an increasing amount. QCQC QWQW 1 1

4. Copyright © 2003 Pearson Education, Inc.Slide 1-4 Diminishing returns: because adding a worker means that each worker has less land to work with, each successive increment of labor will add less to production than the last. Opportunity cost:the amount of production of one type of good that must be sacrificed to produceone more unit of the other. Diminishing Returns

5. Copyright © 2003 Pearson Education, Inc.Slide 1-5 Assumptions--2  ASSUMPTION4:Perfect competition prevails in both industries. In addition, there are no externalities in production.  ASSUMPTION5:Factors of production are perfectly mobile between the industries within the country.

6. Copyright © 2003 Pearson Education, Inc.Slide 1-6 Perfect competition requires that price equals marginal cost. (the price of Q C in terms of Q W must equal the cost of producing Q C in terms of Q W -- = ) PCPWPCPW QWQCQWQC Relationship Between Price Line and Production Point QCQC QWQW Price line Slope = Production point PCPWPCPW

7. Copyright © 2003 Pearson Education, Inc.Slide 1-7 Assumptions-3  ASSUMPTION6:Community preferences in consumption can be represented by a consistent set of community indifference curves. Indifference curves –Each traces a set of combinations of cloth (C) and food (F) consumption that leave the individual equally well off –They have three properties: –Downward sloping –The farther up and to the right each lies, the higher the level of welfare to which it corresponds –Each gets flatter as we move to the right

8. Copyright © 2003 Pearson Education, Inc.Slide 1-8 Indifference Curves QWQW QCQC IC             1 1

9. Copyright © 2003 Pearson Education, Inc.Slide 1-9 Indifference Curves and Individual Utility Maximization P C  Q Cj +P W  Q Wj =M j : Ms.Jones (budget constraint) QWQW QCQC u2 u3 Price line Slope = - P C P W u1 D Consumption point

10. Copyright © 2003 Pearson Education, Inc.Slide 1-10 Assumptions-3 Community indifference curve: A diagram that expresses the preferences of all the consumers of a country.

11. Copyright © 2003 Pearson Education, Inc.Slide 1-11  模型目的。  內生變數。  行為法則。  均衡。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則 判斷此外生變數之改變造成行為法則何種影響 學習經濟模型五步驟 均均衡。

12. Copyright © 2003 Pearson Education, Inc.Slide 1-12 CIC PPF General Equilibrium for a Closed Economy -increasing opportunity costs QCQC QWQW x QC*QC* QW*QW* Price line Slope = - P C P W

13. Copyright © 2003 Pearson Education, Inc.Slide 1-13 General Equilibrium for a Closed Economy -constant opportunity costs QCQC CIC PPF QWQW z QC*QC* QW*QW*