Notes on PPF, Opportunity Cost, and Comparative Advantage (Lecture)

Definition: A PPF shows the maximum combinations of two goods an economy can produce with its resources and technology. It highlights trade-offs.
Key Idea: If you produce more of one good, you must produce less of the other.
Example: If an economy has, say, 50,000 hours of labor, it can produce various amounts of computers and wheat, but only up to its frontier.

To draw a straight-line PPF, plot two extreme points (all resources to one good, zero to the other) and connect them.
Efficiency: Any point on the straight-line PPF uses all resources efficiently. Points inside are feasible but inefficient.

Opportunity Cost (OC): What you give up of one good to get an additional unit of another.
On a straight-line PPF, the OC is constant (the slope is constant).
Example: If sacrificing 1,000 tons of wheat gains 100 computers:
- \text{OC per computer} = \frac{1,000 \text{ tons of wheat}}{100 \text{ computers}} = 10 \text{ tons of wheat per computer}.
Slope: The PPF's slope represents the opportunity cost. A negative slope means trade-off.
- \text{Slope} = \frac{\Delta \text{Vertical Axis Good}}{\Delta \text{Horizontal Axis Good}} . For the example above, slope = -10. The OC is the absolute value of the slope.
OC of the other good: It's the reciprocal of the first good's OC. If OC of computers is 10 wheat, then OC of wheat is \frac{1}{10} (0.1) computers.

Concept: Countries specialize in goods where they have a lower opportunity cost (comparative advantage).
Example Comparison (Cloth OC in terms of Wine):
- France's PPF slope for cloth (wine/cloth) = 2.
- England's PPF slope for cloth (wine/cloth) = \frac{2}{3} .
Conclusion: Cloth is cheaper (lower OC) to produce in England ( \frac{2}{3} < 2 ), so England has a comparative advantage in cloth. France would have a comparative advantage in wine (lower OC for wine).

Straight-line PPF: Assumes constant opportunity costs. Easy for calculations.
Bowed-out (Concave) PPF: More realistic; occurs when OC increases as you produce more of a good.
- Reason: Resources aren't perfectly interchangeable, and specialized resources are shifted, leading to diminishing returns.
- Implication: The slope (and thus OC) changes along the curve. For this course, we mainly use straight-line PPFs for simplicity.

PPF concepts help analyze everyday trade-offs, like allocating time between studies and hobbies. More time for one means less for the other.

For assignments, remember to use rubrics, structure responses in paragraphs, and include labeled graphs created on paper.
Start early, as assignments may cover material from several classes.

PPF: Max combinations of two goods.
Slope: OC of horizontal good in terms of vertical good ( \frac{\Delta \text{Vertical}}{\Delta \text{Horizontal}} ).
Constant OC: Straight-line PPF.
Increasing OC: Bowed-out PPF.