Production Possibilities Absolute Comparative Advantage The Production Possibilities
Production Possibilities, Absolute & Comparative Advantage
The Production Possibilities Curve (PPC) Using Economic Models… Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph Copyright ACDC Leadership 2019
What is the Production Possibilities Curve? • A production possibilities curve (or frontier) is a model that shows alternative ways that an economy can use its scarce resources. • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. • • 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus) Fixed Technology Copyright ACDC Leadership 2019 3
Production Possibilities Curve • Any point on the curve represents an efficient use of resources • Any point inside the curve represents an inefficient use of resources (unemployment) • Any point outside the curve is not possible • The curve can shift inward or outward when there are changes in costs or productive capacity
Production Possibilities A B C D E CALZONES PIZZA 4 3 2 1 0 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Constant Opportunity Cost- Resources are easily adaptable for producing either good. • Result is a straight line PPC (not common). Copyright ACDC Leadership 2019 5
Production Possibilities PIZZA ROBOTS A 20 0 B 19 1 C 16 2 D 10 3 E 0 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Law of Increasing Opportunity Cost • As you produce more of any good, the opportunity cost (forgone production of another good) will increase. • Why? Resources are NOT easily adaptable to producing both goods. • Result is a bowed out (Concave) PPC. Copyright ACDC Leadership 2019
Constant vs. Increasing Opportunity Cost Which product would have a straight line PPC and which would be bowed out? Corn Copyright ACDC Leadership 2019 Cactus Wheat Pineapples
Shifting the Production Possibilities Curve Copyright ACDC Leadership 2019 8
Production Possibilities 4 Key Assumptions Revisited • Only two goods can be produced • Full employment of resources • Fixed Resources (4 Factors) • Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade (allows more consumption) Copyright ACDC Leadership 2019 9
Capital Goods and Future Growth Countries that produce more capital goods will have more growth in the future. Current PPC Future PPC Consumer goods Panama Copyright ACDC Leadership 2019 Mexico – Favors Capital Goods Future PPC Capital Goods Panama – Favors Consumer Goods Current PPC Consumer goods Mexico 10
Absolute & Comparative Advantage
Absolute and Comparative Advantage Absolute Advantage • The producer that can produce the most output OR requires the least amount of inputs (resources). Comparative Advantage • The producer with the lowest opportunity cost. Countries should trade if they have a relatively lower opportunity cost. They should specialize in the good that is “cheaper” for them to produce (the one they have a comparative adv) 12
Output Questions: OOO= Output: Other goes Over Copyright ACDC Leadership 2019 13
Input Questions (The variable is resources or time) IOU= Input: Other goes Under Copyright ACDC Leadership 2019 14
Terms of Trade Both countries can benefit from trade if they each have relatively lower opportunity costs. Terms of Trade- The agreed upon conditions that would benefit both countries. Ex: Trade 1 ton of wheat for 1. 5 tons of sugar Copyright ACDC Leadership 2019 15
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