AP Macroeconomics Unit 1.2 & 1.3 - Opportunity Cost and the Production Possibilities Curve & Comparative Advantage and Gains from Trade
Unit 1.2
What is the Production Possibilities Curve?
Production Possibilities Curve (PPC): model that shows alternative ways that an economy can use scarce resources
- The line on a PPC indicates possibility:
* Anything that’s outside the curve is unattainable
* Anything under the curve indicates something that isn’t maximum achievement/production (inefficient)
* When the line on a PPC moves right, it is good
* When the line on a PPC moves left, it is bad
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What are the four key assumptions of the PPC?
- Only two goods can be produced
- There is full employment of resources
- There is fixed technology
- There are fixed resources (ceteris paribus)
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What does constant opportunity cost look like on a PPC graph?
- A constant slope
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With increasing opportunity cost…
- As more of a particular product is produced, the opportunity cost (in terms of what must be given up of other goods) increases.
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What are the three PPC shifters?
- Changes in Resources
- Changes in Technology
- Changes in Trade
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Relationship between Capital Goods and Future Growth:
- Countries that produce more capital goods are investing in the future and will experience more growth.
* Capital goods: goods that make more goods
* Growth is an outward shift of the PPC
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Unit 1.3
Why do people trade?
- It’s impossible to do everything yourself
- Everyone should specialize in the production of goods and services and then trade with others
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Absolute Advantage vs Comparative Advantage:
Absolute Advantage: the producer who produces more output has this advantage
Comparative Advantage: the producer with the lowest opportunity cost (or the least amount of input [resources] ) has this advantage
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Specialization and Trade:
Countries should trade if
Countries should specialize in the good that is
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