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GSU ECON 2106 - Production Possibility Frontier

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Previous LecturePPF Diagram showing production of coconuts and fishAbsolute Advantage and Comparative AdvantageSculpturesPaintingsMichaelAngeloTransactions: The Circular-Flow of DiagramLecture 3Previous Lecture Chapter 1- Markets move toward equilibrium- Efficiency vs. Equity- Markets usually lead to efficiency (with the exception of market failure)- Government intervenes when market is not efficient - Economy-wide interactionsChapter 2- Models: simplified representations of reality- Introduction to Production Possibility FrontierCurrent Lecture: (Chapter 2 Continued-PPFs explained in more detail)Production Possibility Frontier continued:- The PPF diagram shows the combinations of two goods that are possible for a society to produce at full employment.- We can use the PPF model to answer questions such as- How much can we produce? What will it cost us to change our mix of production? Does it make sense to import the good from somewhere else?PPF Diagram showing production of coconuts and fish-All points under the curve are feasible, but not efficient-All points above the curve are not feasible- All points on the curve are feasible and efficient.-Here, the maximum quantity of coconuts that Tom can gather depends on the quantity of fish he catches, and vice versa. His feasible production is shown by the area inside or on the curve. Production at point C is feasible but not efficient. Points A and B are feasible and efficient in production, but point D is not feasible.- The bowed-out shape of PPF shows increasing opportunity cost. In the example of Tom’s case, in order 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. The Production Possibility Frontier2820 40030915Quantity of coconutsProduction possibility frontierABDCFeasible and efficientin productionNot feasiblePPFQuantity of fishFeasible butnot efficientFigure 1- Obtained from "Microeconomics by Krugman and Wells, 2nd Ed" ECON 2106 1st Editionto produce the first 20 fish, Tom must give up 5 coconuts. However, to produce 20 fish, he must give up 25 more coconuts.- Economic growth results in an outward shift of the PPF because the production possibilities are expanded. At this point, the economy can now produce more of everything. Economic growth can occur due to two factors: 1) increase in factors of production 2)Increase in technological advances.-Factors of Production: 1)Land 2)Labor 3)Physical Capital 4)Human CapitalAbsolute Advantage and Comparative AdvantageAbsolute Advantage: An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage. For example, Mary can bake 15 cookies in an hour and John can bake 5 cookies in an hour. Mary has absolute advantage is baking cookies.Comparative Advantage: An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. Example: SculpturesPaintingsMichael 10 5Angelo 6 2 Who has comparative advantage in paintings? Who has comparative advantage in sculptures?1.) Determine Michael and Angelo’s opportunity cost of producing sculptures and paintings:Micheal-O.C of producing sculptures: what you lose/what you cho0se = 5/10 = ½ PaintingsO.C of producing paintings: what you lose/what you choose = 10/2 = 2 SculpturesAngelo-O.C of producing sculptures: what you lose/what you choose = 2/6 = 1/3 PaintingsO.C. producing paintings: what you lose/what you choose = 6/2 = 3 Sculptures2.) Determine who has the lowest opportunity cost in which activity.Angelo has a lower opportunity cost in producing sculptures, that is, 1/3 paintings than Michael who has an opportunity cost of ½. Michael has a lower opportunity cost in producing paintings, that is, 2 sculptures than Angelo who has O.C of 3.3.) Now determine who has comparative adv. In producing sculptures and paintings.Michael has comparative advantage in paintings, and Angelo has comparative advantage in sculptures.Transactions: The Circular-Flow of Diagram-Trade takes the form of barter when people directly exchange goods or services they have for goods and services they want.- The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle.-The diagram represents the flows of money and goods and services in the economy. In the markets for goods and services, households purchase goods and services from firms, generating a flow of money to the firms and a flow of goods and services to the households. The money flows back to households as firms purchase factors of production from the households in factor markets.Positive Economics- is the branch of economic analysis that describes the way the economy actually works.Normative Economics- makes prescription about the way economy should work. For example, a statement thatasserts, “governments should reduce taxes by 50%.”When and Why Economists Disagree: -1) Which simplifications to make in a model2) Media coverage tends to exaggerate the real differences in views among economists.3) Economics is often tied up in politics.4) Powerful interest groups find and promote economists who profess supportive opinions.5) Economic modeling requires simplifying assumptions.6) Two economists can legitimately disagree about which simplifications are


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