ECO2013 CH3

Introduction to Wind Power

• Wind power is not free despite being a renewable resource.

• Opportunity costs include various goods and services given up to establish renewable energy infrastructure.

Chapter Objectives

• Upon completing the chapter, you will be able to:

  1. Explain economic concepts: scarcity, production efficiency, and tradeoffs using the Production Possibilities Frontier (PPF).

  2. Calculate Opportunity Cost (OC).

  3. Understand factors that expand production possibilities.

  4. Analyze how people benefit from specialization and trade.

Production Possibilities Frontier (PPF)

Definition

• Represents the boundary for combinations of goods/services that can be produced given fixed technology and resources.

• It illustrates scarcity and highlights the limits of production.

Assumptions of the Model

• Technology level is fixed.

• Resource amounts are fixed.

• Assumes analysis of two goods.

Features of the PPF

1. Attainable vs. Unattainable Combinations

   • Points on or inside the PPF are attainable.

   • Points outside the PPF are unattainable (e.g., Point G).

2. Efficient vs. Inefficient Production

   • Production efficiency occurs on the PPF (e.g., at points E or D).

   • Production inefficiency happens inside the PPF (e.g., at point H).

3. Tradeoffs and Free Lunches

   • A tradeoff involves giving up one good to gain another.

   • A "free lunch" refers to obtaining something without forgoing anything else, typically seen inside the PPF.

Opportunity Cost (OC)

Concept of Opportunity Cost

• Defined as the decrease in quantity of one good divided by the increase in another when moving along the PPF.

• Calculation Examples:

  • Moving from Point A to B: 1 cell phone equals 1 DVD.

  • Moving from B to C: 1 cell phone equals 2 DVDs.

  • Moving from C to D: 1 cell phone equals 3 DVDs.

Increasing Opportunity Cost

• OC may increase as more cell phones are produced, indicating tradeoff intensity rises with production.

• Magnitude of the slope of the PPF reflects opportunity cost; it becomes steeper with increased production of a good.

• The PPF is outwardly bowed due to resource heterogeneity.

Economic Growth

• Economic growth refers to the sustained expansion of production possibilities.

• It occurs through technological advancements, enhanced labor quality, or increased capital.

• An outward shift in the PPF indicates economic growth potential.

Specialization and Trade

Absolute Advantage

• Absolute Advantage occurs when a person/nation can produce more of a good with the same resources compared to another.

Comparative Advantage

• Comparative Advantage exists when a person can produce a good at a lower OC than others.

• Example: Liz has a comparative advantage in smoothies; Joe in salads based on their respective opportunity costs.

Gains from Trade

• When Liz and Joe specialize and trade based on their comparative advantages, both benefit.

• Example trades might involve Liz selling smoothies for salads, leading to greater total production and consumption for both.

Conclusion on Wind Power

• Building wind turbines involves considerable resource allocation leading to opportunity costs.

• Wind relies heavily on environmental conditions, producing inefficiencies and transmission challenges across distances to population centers.