1.3 production possibilities curve + 1.4 Comparative advantage &gains from trade

production possibilities curve

measures efficiency + shows alternative ways that an economy can use its scarce resources, shows all combinations 2 goods that can be produced w/ fixed resources

4 key assumptions

1. only 2 goods can be produced

2. full employment of resources

3. fixed resources

4. fixed technology

constant opportunity cost

when resources are easily adaptable for producing either good

increasing opportunity cost

as u produce more of a good the opportunity cost will also increase

bowed out concave PPC

when resources are not easily adaptable to produce both goods

point inside of line

resources are not used to their full potential= recession

on line

efficient

outside of line

impossible

shifting the PPC

1. change in resource quantity or quality, increase= line outwards, decrease=line inwards

2. change in technology- only benefits one good, kicks outwards for that good

3. change in trade- allows for more consumption

absolute advantage

the producer that can produce the most output w/fixed resources or requires the least amount of inputs

comparative advantage

the producer w/ the lowest opportunity cost

calculating per unit opportunity cost

opportunity cost/ units gained

output questions

the amounts of inputs ex. time, employees, are the same for both countries, only the output is different

OOO other goes over

opportunity cost of good a is # of good b/# of good a

input questions

the amount of ouputs like cars, planes are the same for both countries, only inputs are different

IOU other goes under

opportunity cost of good a= # good a/ #good b

if terms of trade are above mutually beneficial range

country w/ comparative advantage benefits, the other is hurt

if terms of term are below mutually beneficial range

country w comparative advantage hurts and the other benefits