ECON 224 1ST EditionExam # 2 Study Guide The PPF and Comparative AdvantageProduction Possibilities Model- Scarcity for a society- how do societies decide which goods and services to produce? - Individuals and Societies have scarce resourceso Time and moneyo Factors of production- They need to decide which goods should be produced individually and as a society with those scarce resources.o As soon as we tell one worker to be a plumber, that is one less worker that can work on roads or computer software- When society decides to produce one good it must determine what the Opportunity Costo What is the next best alternative?o How much of that good must be given up?- The production possibilities model shows the set of choices available to an individual, firm, or societyo What is the best use of their time?- The PPF is a graph of the different combinations of goods services that can be produced. - Production possibility frontier talks about the production- how much can you produce as an individual? How many iPhones can Apple produce? - Assumptions:o Full employment: everyone that wants a job has a job, all of our capital is being used, all of our land is being usedo Fixed resources: fixed amount of land, capital, labor. Keep the same over our time period. o Fixed technology: nothing is going to change, no technological improvement that can make production happen faster.o Two goods: our economy only has two choice: good 1 or good 2?- The PPF tells us how much CAN be produced, not how much SHOULD or WILL be produced. - Example: The United Stateso One Resource: Labor, measured in hours The U.S. has 50,000 hours of labor available each montho Produces Two Goods: Computers and Wheat Producing one computer requires 100 hours Producing one ton of wheat requires 10 hourso We will look at how much of each good the United States can produceo Graphing Quantity on both axis The U.S. has enough labor to produce 500 computers, or 5000 tons of wheat, or any combination along the PPF The blue line represents what we CAN produce and is our PPF Budget line solved the individual problem, PPF solves societies problem- Suppose that the United States decides to produce 300 computers, how much wheat can be produced? o It will take 30,000 hours (300 comp*100 hours per comp.)o This means there are 20,000 hours left for production of wheat (50,000-30,000)o In 20,000 hours we can produce 2,000 tons of wheat- Suppose the United States wishes to produce 400 computers and 2,000 tons of wheat. This is not possibleo We do not have enough labor to produce that combination- Any point outside of PPF= unattainable- Points inside of PPF= attainable, but inefficient- Any point on the PPF is attainable and efficiento Using all of our resources- Society decides we want to produce not all wheat but some computers, going to have to give something upo Society wants 500 computers= produce less wheat  How much wheat must we give up? 1,000 tonso Constant opportunity cost= the cost is always the name no matter the quantity*Law of Increasing Opportunity Costs - In the real world not all resources are created equalo Phil Robertson is really good at making duck callso I am ok at teaching economicso Can not expect both people to be good at the same thing- Society and individuals are better off when we specialize in what we are good at. - Our resources can be more productive- Bowed PPF- As production of good increases, the opportunity cost of producing an additional unit rises. - Not all resources are equally productive in producing a good or service. o Hard to grow peaches in the Midwest Grow corn instead and tradeo Difficult to grow potatoes in the Southo Doctors shouldn’t do yard workUnemployment- Unemployment means that the country is producing inside their PPFo Underutilized land - Attainable and inefficient- Not at the full employment level- Could produce more of one good without the opportunity cost o Will not cost us anything to produce more because we have people producing no labor so we can produce more of one good without costing us another good- Moving toward full employment will increase output- If we decide we want to dedicate our hours to computers/wheat we move from the base of the green arrow to the tip of the green arrow without costing us any wheat/computersGrowing Economy - Economic growth: drop the assumption of fixed resources and technology- Increased resource supply:o Increased labor force and entrepreneurial abilityo Stock of capital o New sources of resources (natural gas)  More information of what we can do with our resources Loosing fixed constraint that we had before- Improvements in Resource Qualityo Better educated work force- Advances in Technologyo New and better goodso Improved methods of production- Production possibilities shift outwardo Points that were previously unattainable are now attainable and our old PPF is now inefficient - Technological improvemento Suppose a new tractor is invented that allows for faster production of wheat. How will this effect the production of wheat? How will this effect the production of computers?o If we spend all our time producing Wheat, there will be an increase in population Computers, there will be no chargeo Even though we invented a new tractor it could mean that we are spending all of our time producing computers or it could mean we produce more wheat or a combination ofthe two Cost of Production and Pricing- How do individual firms decide the level of production they should produce?- How do prices affect production?Questions all Businesses Must Answer1. Should the firm produce?2. How much should the firm produce?3. Will the company experience an ECONOMIC profit?a. Opportunity costsThe Business Population- Planto Factory, farm, mine, store, website, warehouseo Ford Plant in Detroito Smallest branch- Firmo Operates one or more plantso Ford Motor Companyo We assume that the firm’s goal is to maximize profit**o Profit= Total Revenue- Total Cost Total revenue= the amount a firm receives from the sale of its output Total cost= the market value of the inputs a firm uses in production- Industryo Group of firms that produce the same productso Automobile IndustryEconomic Costs- Explicit costs require an outlay of moneyo Monetary paymentso Paying wages to workers- Implicit costs do not require a cash outlay o Value of next best useo The opportunity cost of the owner’s time- Example: Explicit vs. Implicito