Introduction to Economics: Social Issues and Economic Think - PowerPoint Presentation

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Introduction to Economics: Social Issues and Economic Think - PPT Presentation

Wendy A Stock PowerPoint Prepared by Z Pan Chapter 2 production possibilities Copyright 2013 John Wiley amp Sons Inc Photo Credit Pedro PortalAPWide World Photos Explain the importance of models in economics ID: 429263

2013 amp sons copyright amp 2013 copyright sons wiley john ppf yogurt produce producing opportunity economic advantage production possibilities

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Introduction to Economics: Social Issues and Economic ThinkingWendy A. StockPowerPoint Prepared by Z. Pan

Chapter 2production possibilities

Explain the importance of models in economicsDescribe the production possibilities modelIllustrate the use of the production possibilities modelCalculate opportunity costs of productionDefine

the concept of comparative advantageApply the concept of comparative advantage to demonstrate the benefits of specialization and trade

Models are used in economics and most other sciences to represent reality. Like a map, a Model

is a simplification that captures the most important features of something but does not include each and every detail

Production Possibilities Model Combinations of goods or services that can be produced by an individual, a group, or an entire economy given the resources

4PRODUCTION POSSIBILITIES MODELSlide5

Production Possibilities Frontier (PPF) --maximum amount of output that can be produced with a given

Production possibility frontierSlide6

The production possibilities model shows some important relationships that represent the choices facing an individual, a firm or an entire economy.

What’s in a PPF?Slide8

Scarcity and Tradeoffs Attainable and Unattainable Choices Points on or inside the PPF are attainable

Points outside the PPF are unattainable Efficiency and Inefficiency

Combinations of output that lie on the PPF represent efficient choices. Combinations of output that lie inside the PPF represent inefficient choices.Copyright © 2013 John Wiley & Sons, Inc.8Some important economic relationships implied in PPFSlide9

9Some important economic relationships implied in PPFSlide10

10Some important economic relationships implied in PPFSlide11

Opportunity Cost The slope of the PPF equals the opportunity cost of producing one more unit of the good measured on the X-axis.

Some important economic relationships implied in PPFSlide12

Absolute Advantage: the ability to produce something with fewer resources or to produce more with the same resources as another producer

. Comparative Advantage: the ability to produce a good or service at a

For Dan: The opportunity cost of producing 1 pint of yogurt is 5 bagels per day:

1Y=5BThe opportunity cost of producing 1 bagel is 1/5 pint of yogurt:

1B = 1/5Y For Betty: The opportunity cost of producing 1 pint of yogurt is 3 bagels per day: 1Y=3BThe opportunity cost of producing 1 bagel is 1/3 pint of yogurt: 1B = 1/3YCopyright © 2013 John Wiley & Sons, Inc.15comparative advantageSlide16

Because Betty can produce yogurt at a lower opportunity cost (3B) than Dan(5B), she has comparative advantage relative to him in producing yogurt. Because Dan ’s cost of producing 1 bagel (0.2Y) is lower than Betty ’s (0.33Y), Dan has comparative advantage relative to Betty in producing bagels.

Dan will specialize in producing bagels, he will produce 300 bagels and no yogurt. Betty will specialize in producing yogurt

. She will produce 40 pints of yogurt and no bagels. The mutually beneficial terms of trade is3B < 1Y < 5B

Assuming: 1Y = 4BDan trades 100 bagels to Betty at this price, he will receive 25 pints of yogurt

Gains from specialization & tradeSlide19

Normative Economics deals with value judgments and decisions regarding how things should be.

Positive Economics is more objective and provides descriptions of how things are.

The three basic economic questions regarding resource allocation are: What to produce?

How to produce it? For whom to produce

possibility frontiers (PPFs)?The slope of the PPF reflects the opportunity costs of producing different combinations of two goods.

Combinations of goods can be produced inside or outside the PPF, ceteris paribus.Points inside the PPF boundary are attainable and efficient.Only points along the frontier line are attainable and efficient.Both A and CBoth A and DSlide22

Production possibilities modelProduction possibilities frontierAttainable choicesUnattainable choicesEfficient choicesInefficient choicesSlope of the PPF

Absolute advantageComparative advantageNormative economicsPositive economicsBasic economic questions