Principles of Economics 3e Chapter 2 CHOICE IN A WORLD OF SCARCITY

Healthcare vs. Education Production Possibilities Frontier, Continued
• Productive efficiency -
• All choices along a given PPF like B, C, and D display productive efficiency.
• R does not, because it is inside the PPF curve, and thus not all resources are
being used.

The PPF and Comparative Advantage
• How much of a good a country decides to produce depends on how
expensive it is to produce it versus buying it from a different country.
• Countries tend to have different opportunity costs of producing a
specific good, either because of different climates, geography,
technology, or skills.
• Comparative advantage - when a country can produce a good at a
lower opportunity cost than another country.

The PPF and Comparative Advantage
• The U.S. PPF is flatter than the Brazil PPF implying that the opportunity cost
of wheat in terms of sugar cane is lower in the U.S. than in Brazil.
• Conversely, the opportunity cost of sugar cane is lower in Brazil.
• The U.S. has comparative advantage in wheat and Brazil has comparative
advantage in sugar cane.

2.3 Confronting Objections to the Economic Approach
Objections in understanding the economic approach to decision-
making:
1) People, firms, and society do not act in a way that fits the economic
way of thinking.
• However, it is reasonable, as a first approximation, to analyze them with the
tools of economic analysis.
• Will be addressed in a later chapter on consumer choices.

Confronting Objections to the Economic Approach
Objections in understanding the economic approach to decision-
making:
2) People, firms, and society should not act this way.
• The economics approach:
• Portrays people as self-interested, but economics is not a form of moral instruction.
• Seeks to describe economic behavior as it actually exists.
• Uses, positive statements, which describe the world as it is. These are factual.
• Tries to avoid normative statements, which describe how the world should be. These
statements are subjective questions of opinion.

Confronting Objections to the Economic Approach
• Invisible hand - concept that individuals' self-interested behavior can lead to
positive social outcomes
• Identified in Adam Smith’s The Wealth of Nations.
• Consumers will encourage businesses to offer goods and services that meet their
needs.
• It is possible that broader social good can emerge from selfish individual actions.
• Self-interest in economics does not not imply self-interest in all aspects of life