learning objectives: the economic problem lo4: understand why trade results in economies being more...
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Learning Objectives:
The Economic Problem
LO4: Understand why trade results in economies being more productive
LO5: Explain the three fundamental questions and the four ways economies can be organized
LO6: Use the production possibilities model to explain choice, opportunity cost, efficiency, and unemployment
CHAPTER 1
1-1© 2012 McGraw-Hill Ryerson Limited
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Production Possibilities Model
Production Possibilities Curve: – A graphical representation of the various
combinations of maximum output that can be produced from the available resources and technology
– Assumptions: • Full employment
• Use of the best technology available
• Productive efficiency
1-2© 2012 McGraw-Hill Ryerson Limited
LO6
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Production Possibilities Model
1-3© 2012 McGraw-Hill Ryerson Limited
LO6
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Figure 1.1
Unattainable
x
ab
c
d
e
Wheat
Cars
Attainable
2019
8
17
13
f
10 2418 3028
LO6
© 2012 McGraw-Hill Ryerson Limited 1-4
- points on the curve represent maximum output possible with available resources
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Production Possibilities Model
Scarcity – Represented by points outside the curve
Choice – Represented by points on the curve (efficient) and
points within the curve (inefficient)
Opportunity Cost – Represented by the downward slope of the curve
1-5© 2012 McGraw-Hill Ryerson Limited
LO6
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Law of Increasing Opportunity Costs
– Factors of production are not equally suitable
– As output increases, the per unit costs of additional units increases
– Gives the production possibilities curve its bowed out shape
1-6© 2012 McGraw-Hill Ryerson Limited
LO6
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Figure 1.2
aWheat
Cars
2019
8
17
13
f
10 2418 3028
+8-2b
c
d
e
+6-4
+4
-5
Law of Increasing Opportunity Costs
LO6
© 2012 McGraw-Hill Ryerson Limited 1-7
- as more cars are produced, an increasing amount of wheat must be given up
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Self-Test 5• If society produces 1000 units of butter, how many guns
can it produce?• If society is at “b” on the PPC, what is the cost of 1000
more units of butter?
Qu
anti
ty o
f g
un
s p
er
per
iod
Quantity of butter per period
400
300
150
1000 2000 3000
b
c
d
• Is opportunity cost greater for move from “c” to “d” compared to a move from “b” to “c”?
© 2012 McGraw-Hill Ryerson Limited 1-8
LO6
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PPC and Economic Growth
1-9© 2012 McGraw-Hill Ryerson Limited
LO6
Growth means the economy is able to produce more of everything
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PPC and Technological Change
1-10© 2012 McGraw-Hill Ryerson Limited
LO6
- Improvement in technology shifts curve to PP2- can produce more of either good, or more of both
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Self-Test 6
a. Draw a PPC1 with tools on the horizontal axis
Now, assume new technology that can be used only in the tool industry is developed, which increases tool output by 50%.
b. Draw a new PPC2 that reflects this new technology
c. If Finhorn produced 12 units of tools per year, how many units of grain could be produced after the introduction of the new technology
© 2012 McGraw-Hill Ryerson Limited 1-11
LO6