Choice under scarcity

reading: ch1, ch8


  1. Identify relevant opportunity costs of a decision.

  2. Describe the role of opportunity cost in a production possibility

frontier (PPF).

  1. Differentiate between resource and technology changes and their

impact on a PPF.

  1. Classify absolute and comparative advantage across individuals

or countries.

  1. Devise a trade scenario where both sides benefit based on

comparative advantage



Production Possibility Frontier

  • shows max combinations of two goods a society can produce

  • visualizes scarcity- limited resources; producing one decreases production of the other

  • shows opportunity cost: value of what is given up when choosing one option over another


Point A: extreme, all resources put towards making wine

Point B: extreme, all resources put towards making cheese

Point C (efficiency): economy is efficient, all resources are being used

Point D (Misallocation): inefficient, should reallocate resources

Point E (unfeasible): not feasible, not enough resources


Efficiency on the PPF

efficiency: producing as much as possible within limited resources

Misallocation: producing less than what is possible with available resources

unfeasible: levels of production are impossible to achieve with limited resources


PPE can shift when:

  • change in resources: improved, can do more // decrease our production

  • change in technology: can do more, produce more


Linear PPF

resources are interchangeable

trade-off is constant, giving up same amoount of one unit for another

PPF has constant slope, thus constant opportunity cost

machine produces wine and cheese equally well


Curved PPF

resources not adaptable

when shift, give up increasing amt of one good to produce other

Opportunity cost rises as we specialize


shifts

change in resources: improved, can do more // decrease our production

change in technology: can do more, produce more

outward shift: economic growth, more of goods can be produced

inward shift: economic decline, less of both goods can be produced

uniform/parallel shift: a resource/tech shift affects both goods equally

one-sided shift: improvement only helps one good



Moving along PPF represents changing trade offs

shift of PPF represents change in capacity to make goods


Calculating OC

opportunity cost of good A = decrease in good A/ decrease in good B


concert $60, dinner $30

opportunity cost = 2 dinners, $60 can buy 1 concert, 2 dinners





Specialization

division of labor- break down production into steps to allow workers to specialize

^ specialization = ^ productivity


why?

  1. practice: workers master a single task, become more efficient

  2. innovation: specialized workers figure out how to improve their task

  3. economies of scale: large scale production lowers cost per unit


Trade

absolute advantage

a country can produce a good using fewer resources than other country


England has absolute advantage in clothes, should specialize

Portugal has absolute advantage in wine, should specialize


comparative advantage

produce good with lowest opportunity cost