1Economic GrowthShifting of the PPFSUVs0XYZCarsHow can we get to point Z from a production standpoint?Economic Growth • Recall, economic growth - this can be shown by an outward shift of the PPF 2 key factors of economic growth -1) Technical Progress2) Capital accumulation **Capital goods vs. consumption goods trade-off • What would a shift inward of the PPF represent??? • What might cause this??2Multiple Plant Production• Suppose the firm producing cars/SUVs has another plant(plant B). It employs the same amount of resources as does the first plant (plant A) and follows this production schedule:CARS SUVs 0 100 25 75 50 50 25 75 100 0 Which plant has the lowest cost of producing (additional) SUVs?Of producing (additional) cars? From plant A:• Opportunity cost of bus: 2 cars • Opportunity cost of car: 2 bus In plant B:• Opportunity cost of bus: 1 car • Opportunity cost of car: 1 busThus, lowest cost of bus------- PLANT BLowest cost of car------- PLANT AIf I want to produce 125 SUVs, which plant should producehow much??? What if I want to produce 125 cars???Comparative Advantage• This difference in costs leads to the notion of comparative advantage Definition:A person has a comparative advantage in an activity if she canperform that activity for a lower cost than any other person. This applies to nations, firms, economies, etc. and the activityis usually production. Thus, in our case, Plant_____has a comparative advantage in the production of cars and Plant ____ has a comparative advantage in the production of SUVs.3Comp Adv. And Specialization• If production is efficient, then comparative advantage leads to specialization in production Examples:Adam Smith’s pin factory Assembly-line at auto plant Nations: Hong Kong vs. United States • Specialization leads to greater quantities produced • Specialization can be seen in the PPF as
View Full Document
Unlocking...