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All resources are fixed in quantity All resources are fully employed Existing technology is fixed.

Production possibilities. Assumptions. All resources are fixed in quantity All resources are fully employed Existing technology is fixed. You have a choice of 2 goods to produce. Production possibilities. Table. Pizzas (10,000) 0 1 2 3 4 Road Pavers 10 9 7 4 0. Opportunity Costs?.

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All resources are fixed in quantity All resources are fully employed Existing technology is fixed.

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  1. Production possibilities Assumptions • All resources are fixed in quantity • All resources are fully employed • Existing technology is fixed. • You have a choice of 2 goods to produce

  2. Production possibilities Table Pizzas (10,000) 0 1 2 3 4 Road Pavers 10 9 7 4 0 Opportunity Costs? A to B? + Pizza ___ , - Pavers ___ B to C? + Pizza ___ , - Pavers ___ C to D? + Pizza ___ , - Pavers ___ D to E? + Pizza ___ , - Pavers ___

  3. Production possibilities Curve (or Frontier) Result of combination: A- B- C- D- 10 Future Growth A 9 D 7 Less Growth Road Pavers Capital good B C 4 Unemployment Use up resources 0 1 2 3 4 Pizzas Consumer good

  4. Production PossibilitiesCurve ( PPC ) Production Possibilities Curve for Susan’s grades in English and Economics (10 hrs of study) Expected grade in Economics 101 • Susan has 10 hours of study to divide between Economics and English. A • If she spends most of her time studying economics, she can earn an A in economics … B and a D in English. C • If she splits her time between the two, she can earn a B in Economics … D and a B in English. Expected grade in English 101 F F D C B A • If she spends most of her time studying English, she can earn a D in Economics … • Mapping out all the possibilities of how Susan can divide her time (limited resources) between these activities shows us herProduction Possibilities Curve ( PPC ). and an A in English.

  5. Only clothingis produced Production PossibilitiesCurve ( PPC ) S All output combinations on the frontier curve are efficient. A B D C - Inefficiency - Only foodis produced T Production Possibilities Curve for a nation’s economy (given limited resources) • An economy with limited resources has to divide productionbetween clothing and food. Output of clothing • If it allocates all of its resources toward the production of clothing, then it can produce at point S. • If the it allocates all of its resources toward the production of food, then it can produce at point T. • Mapping out all the possibilities of gives us the economy’s Production Possibilities Curve. • Output combinations A, B, & C are all on the PPC and are, therefore, efficient allocations of resources. Outputof food • D is within the PPC and represents an inefficient resource allocation. Combination B delivers more food with the same output of clothing.

  6. PPC 2010withA PPC 2000 A Investment and Production Possibilities in the Future Investmentgoods • The long-term benefits of investment goods now include greater output in the future. The decisions we make today regarding how much to save (investment) and consume determine the shape of the PPC 10 years from now. • If we choose to produce a mixture of consumption and investment goods which corresponds to bundle A … IA then the future PPC might move out to PPC 2010 with A– due to the new buildings, equipment, training, and other forms of investment goods that IA represents. CA Consumptiongoods

  7. PPC 2010with B PPC 2010withA PPC 2000 B Investment and Production Possibilities in the Future Investmentgoods • If we choose to produce a mixture of consumption and investment goods which corresponds to bundle B, with fewer consumption goods (CB<CA) and more investment (IB>IA) … then the future PPC might move out to PPC 2010 with B instead. IB A IA • The level of investment (savings) in an economy is only one determinant of the movement outward (or inward) of the production possibilities curve. CB CA Consumptiongoods

  8. Shifting the Production Possibilities Curve Outward • An increaseinthe economy’s resource basewould expand our ability to produce goods and services. (More workers, ores...) • Advancements in technologycan expand the economy’s production possibilities. • An improvement in the rules(laws, institutions, and policies)of the economy can increase output. (Oil drilling, logging) • By working harder and giving up current leisure, we could increase our production of goods and services. (Longer work week) • This requires us to give up something else we value: leisure.

  9. 1. Point A is a. unattainable. b. inefficient. c. efficient. d. preferable to point B. b. inefficient. 2. Which of the following is true? a. If the economy operates at point A, it is impossible to produce more of both food and clothing. b. If the economy operates at point B, it is impossible to increase the output of clothing without giving up food production. c. If the economy operates at point A, resources are being used efficiently. d. If the economy operates at point B, resources are being used inefficiently.

  10. Other Ways of Getting More Goods and Services than current Resources allow

  11. 1. Comparative Advantage The joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer. • Trading partners can gain by specializing in the production of goods they can produce at a relatively low cost and trade for goods they could only produce at a relatively high cost. • It applies across individuals, firms, regions and countries.

  12. Production Possibilities Bonsai Areca Guns Butter • 0 12 1 • 2 • 3 0 4 Guns Butter • 0 • 2 • 4 0 6

  13. Production Possibilities Bonsai Areca Guns Butter • 0 • 2 • 4 0 6 Guns Butter • 0 12 1 • 2 • 3 0 4 Guns Guns Butter Butter

  14. International Example Production Possibilities - Mexico 1 S = __ A 1 A = __ S Production Possibilities - US 1 S = __ A 1 A = __ S Absolute advantage? US should produce? Mexico should produce? Terms of Trade? ___ A for ___ S

  15. 1. Which of the following sayings best reflects the concept of opportunity cost? a. “You can’t teach an old dog new tricks.” b. “Time is money.” c. “I have a baker’s dozen.” d. “There’s no business like show business.” 2. The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is a. an expansion in investment resulting from a reallocation of resources away from consumption. b. a larger output resulting from a more efficient use of resources. c. greater equality of income resulting from an increase in the number of workers. d. an increase in the profitability of business enterprises resulting from an increase in investment.

  16. 3. If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who a. have the highest opportunity cost. b. have a comparative advantage in the productive activity. c. can complete the productive activity most rapidly. d. least enjoy performing the productive activity. b. have a comparative advantage in the productive activity.

  17. The Circular Flow of Goods and Services Payments $$ Product/Goods and Services Markets 4 Participants Businesses Households Factor/Resource Markets Resources

  18. Circular Flow Markets 1. Resource Market:a. Business firms demand resources b. Households supply labor and other resources c. in exchange for income. • Goods and Services Market:a. Businesses supply goods&services b. Receive sales revenue. c. Households, investors, governments, and foreigners (net exports)demand goods.

  19. Which one? a. A real flow through a product market? b. A money flow through a product market? c. A real flow through a resource market? d. A money flow through a resource market? 1. Receiving a paycheck at the end of each month? 2. Delivering a specially ordered car to a buyer? 3. Receiving patient care in a hospital? 4. Using a credit card to buy a meal in a restaurant? 5. Earning profit at your summer ice cream stand? 6. Obtaining college credits? 7. Working overtime? a d b c

  20. The Circular Flow of Goods and Services Goods and Services Markets Payments $$ Goods and Services Payments with Government Involvement Business Taxes Income Taxes Goods and Services Goods and Services Businesses Households Resources Payments and Legal Resource Markets Resources

  21. Another Circular Flow

  22. The Circular Flow Diagram • Four key markets coordinate the circular flow of income. • 1. the resource market coordinates demand for factors of production between businesses and households. 2. The goods & services marketcoordinates the demand for output between businesses and households. 3. The loanable funds marketdirects household and foreign investments to business and government borrowers . 4. The foreign exchange market coordinates demand for currencies for export/import transactions

  23. Another Circular Flow

  24. 1) BMW recently decided to build a manufacturing plant in Shenyang, China. At this plant, BMW is able to take advantage of paying lower wages to its Chinese workers than it pays its German workers, but it also sacrifices the high levels of technical training possessed by its German workers. In deciding to open the Shenyang plant, BMW A) faced no trade-offs because employing lower-wage workers increased efficiency. B) faced a trade-off between higher cost and lower precision. C) adopted a negative technological change because it replaced high-skilled workers with low-skilled workers. D) eroded some of its competitiveness in the luxury car market because of its decreased cost of production. 2) The principle of opportunity cost is that A) in a market economy, taking advantage of profitable opportunities involves some money cost. B) the economic cost of using a factor of production is the alternative use of that factor that is given up. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application.  3) The attainable production points on a production possibility curve are A) the horizontal and vertical intercepts. B) the points along the production possibilities frontier. C) the points outside the area enclosed by the production possibilities frontier. D) the points along and inside the production possibility frontier.

  25. 4) Point A is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination. 5) This figure shows the production possibilities frontier for Mendonca, an agrarian nation that produces two goods, meat and vegetables. What is the opportunity cost of one pound of vegetables? A) ¾ pound of meat B) 1.2 pounds of meat C) 1 1/3 pounds of meat D) 12 pounds of meat 6) An outward shift of a nation's production possibilities curve represents A) economic growth. B) rising prices of the two goods on the production possibilities frontier. C) an impossible situation. D) where a country produces more of one good and less of another.

  26. 7) The table shows the output per week of two jewelers, Serena and Haley. They can either devote their time to making bracelets or making necklaces. Which of the following statements is true? A) Haley has a comparative advantage in making both products. B) Serena has a comparative advantage in making both products. C) Haley has a comparative advantage in making bracelets and Serena in making necklaces. D) Haley has a comparative advantage in making necklaces and Serena in making bracelets. 8) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except A) engage in mutually beneficial trade with other nations. B) increase the variety of products that it can consume with no increase in resources. C) consume a combination of goods that lies outside its own production possibilities frontier. D) produce a combination of goods that lies outside its own production possibilities frontier.

  27. 9) An example of a factor of production is A) stock issued by Dell. B) the computers exported by Dell. C) a computer produced by Dell. D) a worker hired by Dell. 10) Which of the following statements about an entrepreneur is false? A) organizes the other factors of production into a working unit B) develops the vision for the firm and funds the producing unit C) sells his entrepreneurial services in the output market D) risks the personal funds provided 11) Households A) have no influence on the circular flow in a market economy. B) purchase resources in the factor market. C) sell goods in the product market. D) sell resources in the factor market.

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