The PPF, Comparative Advantage,and International Trade- Production possibilities Modelo Individuals Production and Societies have scarce resources Time and Money  Factors of Production o They need to decide which goods should be produced individually as a society with those scarce resourceso When society decides to produce one good it must determine what the Opportunity Cost is What is the next best alternative? How much of that good must be given up?o The production possibilities model shows the set of choices available to an individual, firm, or societyo The PPF (Production Possibility Frontier) is a graph of the different combinations of goods and services that can be produced: what is attainable to produce/ what can they produceo Assumptions Full Employment- Everyone who wants a job has one and they work the amount of hours that they want to  Fixed Resources - Land, Labor, capital, and entrepreneurial ability Fixed Technology Two Goods - Assume they can only produce 2 goods, one or the other, x or y o The PPF tells us how much CAN be produced, not how much SHOULD OR WILL be produced.  Only tells us what is possible to be produced, not what will or should be produced  Best Outcome: answer should be I don’t know with PPF, because only tells you what is possible, not what is efficient or anything like that - Ex: United Stateso One Resource: Labor, measured in hours The US has 50,000 hours of labor available each month o Produces Two Goods: Computers and Wheat Producing one computer requires 100 hours  Producing one ton of wheat requires 10 hours o We will look at how much of each good the US can produceo If they produce 300 computers, they can produce 2,000 tons of wheat If they want to produce 400 computers 2,000 tons of wheat, this us unattainable- Any point outside the PPF line is unattainable, there is not enough resources to get there A point inside the line is attainable, but inefficient  A point on the line is attainable and efficient - Law of Increasing Opportunity Costs o In the real world, not all resources are created equal  Phil Robertson is really good at making duck calls Mrs. B Is okay at teaching economicso Society and Individuals are better off when we specialize in what we are good ato Our resources can be more productive o Bowes out: specialization - Phil can make a lot of duck calls without giving up economics- For Liz to make a lot of duck calls, she would have to give up a lot of economicso As production of a good increases, the opportunity cost of producing an additional unit rises If Liz wants to make 2 duck calls instead of one, she is giving up more and more economics, the “cost” is increasing o Not all resources are equally productive in producing a good or service Hard to grow peaches in the Midwest  Difficult to grow potatoes in the South Doctors don’t spend their time cutting grass- Unemployment o Means that the country is producing inside their PPF Not at the full employment level  Could produce more of one good without the opportunity cost A point that is attainable, but inefficient o Moving toward full employment will increase output  At Zero Opportunity Cost- Don’t have to give up one thing to get the other because there are idle resources - A Growing Economy o Economic Growth: Drop the assumption of fixed resources and technology Increased Resource Supply- Increased labor force and entrepreneurial ability- Stock of Capital - New sources of resources (natural gas) Improvements in resource quality- Better educated work forces Advances in technology- New and better goods - Improved production methods Production Possibilities: U.S.-o a natural disaster would shift the line downward, it would be a smaller set of points available to us o Technological Improvement Suppose a new tractor is invented that allows for faster production of wheat - This would cause the production of wheat to go up - But the production of computers will go up  If we spend all of our time producing - Wheat, there will be an increase in production - Computers, there will be no change - if the advance only effects one product, it would cause the PPF to pivot outward- Present Choices and Future Possibilities o Society also faces a decision of Present or Future Consumption: Future Consumption - Should we consume the goods now or invest in the future? If we invest our scarce resources in capital goods - We can produce more goods in the future - More options in the future - Example: Japan o 30,000 hours of labor  125 per computer 25 per ton of wheato- What should each country produce?o Absolute Advantage: the ability to produce a good using fewer inputs than another producer  Requires the least amount of time to produce a goodo Ex: the US has an absolute advantage in wheat; producing a ton of wheat using 10 labor hours in the US vs. 25 in Japan  Who has the absolute advantage in computers - US 100 hours vs. 125 to japan o if each country has an absolute advantage in one good and specializes in that good, thenboth countries can gain from trade - Comparative Advantageo Two countries can also gain from trade when each specialize in the good it produces at lowest costo Absolute advantage measures the cost of a good in terms of the inputs required to produce ito But the OPPORTUNITY COST is also important The opportunity cost of a computer is the amount of wheat that would have been produced using the labor needed to produce that one computero Comparative Advantage: a lower relative opportunity cost than that of another person, producer, or country o Which country has the comparative advantage in computers  To answer this we must determine the opportunity cost of a computer in each country - What is the cost of one computer in the U.S. ?o Measure in terms of wheat o How much wheat must we give up to get one more computer?o Producing additional computer requires 100 labor hours, these hours instead could have produced how much wheat? 100/10=10o Answer: 10 tons of wheat= cost/price of making a computer- What is the cost of one computer in Japan?o Measure in terms of wheato How much Wheat must we give up to get one more computer?o Producing additional computer requires 125 labor hours, these hours instead could have produced how much wheat? 125/25=5o Answer: 5 tons of wheat=cost/price of