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ISU ECO 105 - Production Possibility Frontier
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ECON 105 Lecture 3 Outline of Last Lecture I. Marginal Analysis II. Economic ProblemsIII. Relative and Money PricesOutline of Current Lecture I. Production Possibilities Frontier (PPF)A. Definition of PPFB. Points on the graphC. What shift the PPFII. Shape of PPFa. Law of Increasing Costsb. Law of Diminishing returnsc. Law of Comparative AdvantageIII. Distinction between comparative vs absolute advantage IV. Practice QuestionsCurrent LectureProduction Possibilities Frontier (PPF)PPF - shows the maximum combination of goods and services that an economy can produce with a givenresource (land, labor, capital) and current technologyPoints on the PPF graph: attainable and efficent (A)Points beyond the graph: unattainable (B)Points inside the graph: attainable and INefficient (C) - When resources and/or technology changes, the PPF either shifts or rotates- Rotate These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. PPF GRAPHBACShifShape of PPFLaw of increasing costs: as you produce more of a good its opportunity cost per unit goes up (trade off becomes more severe)  this is the reason for the outward shape of the PPFLaw of Diminishing Returns: as you increase one input (land, labor, capital) in equal increments holding all other inputs the same, the additions to output will eventually diminish*according to the Law of Diminishing Return increase in output will decreaseLaw of comparative advantage: Focuses on specialization, Better for others to specialize in those activities in which their comparative advantage over others is the greatest or comparative disadvantage is the leastPractice Questions/ Review1) The economic reason for the PPF to be bowed outward is? ______________2) The opportunity cost of any activity is the cost of the? __________________3) Four main factors of production are? ________, _______, _______, ________Answers1) Law of increasing costs2) Next best alternative3) Land, labor, capital &


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ISU ECO 105 - Production Possibility Frontier

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