Ch. 2: Trade Offs and Comparative Advantage

• Productive Possibilities Frontiers Model

• What does a PPF represent

Production Possibilities Frontier

A curve showing the max attainable combinations of two goods that can be produced with available resources and current technology

• Any assumptions?

Assumptions:

1. Countries have a fixed quantity of resources and technology “take a snapshot in time”

2. Each country can produce only 2 types of goods or services

3. Resources are identical in productions

• Attainable vs. Unattainable 

Attainable: points inside and outside the PPF

Unattainable: points outside the PPF

• Efficient vs. Inefficient

Points below the curve are inefficient

Points on the curve are efficient

• Economic Growth (Shifts)

Shifts in PPF represent economic growth

Economic growth: the ability of the economy to increase the production of goods and services

• Linear vs. Curved PPF: What is the difference?

• Be able to calculate opportunity costs

Opportunity costs are constant when resources are identical in production

Opportunity costs are often increasing because some resources are better suited to one task than another

The more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity

• Absolute advantage vs. Comparative advantage

Absolute advantage: the ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources

Comparative Advantage: the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors