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ECON 103 Lecture 2

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ECON 103

Tobey Chen ECON 103 2011 Spring Chapter 2: Economic Models: Tradeoffs and Traded Models: simplified representations of reality  Test one change at a time (assume all other factors held constant) o The other things equal assumption o E.g. What if the price of a good changes?  Assume income, preferences, product quality, and other available products all remain the same. Three models 1. The Production Possibility Frontier  Because resources are scarce, then we must make tradeoffs in production  Time and materials can only be spent making one good or another. o E.g. baking cookies versus a cake  Assume an economy only produces two goods. e.g. a) Shows the maximum number of coconuts or fish that could be gathered if all resources devoted to producing one or the other. b) Shows all possible combinations of coconuts and fish that could be gathered with all possible combinations of resources used to catch and gather. Coconuts Fish 30 0 25 20 20 30 15 35 0 40 1 Tobey Chen ECON 103 2011 Spring The Production Possibility Frontier 40 30 20 .A B. 10 PPF 0 0 10 20 30 40 50 PPF = all possible combinations of goods produced when all resources are used  Points outside the PPF are not possible because there aren’t enough resources. --- Point A  Points inside the curve are inefficient because not using all the resources. ----point B  More of one good could be produced without making less of the other good.  Interpreting the slope of the PPF The absolute value of the slope of the PPF is the opportunity cost of the good represented on the x–axis in terms of the good on the y–axis  Combinations along the PPF are efficient because more of one good can only be produced if less of the other good is produced. ---tradeoff  The amount of one good that had to be given up to make more of the other is the opportunity cost of additional production. O.C = *Opportunity cost of production generally increases as quantity produced increases.* 2 Tobey Chen ECON 103 2011 Spring  Because if only a small amount is produced, the most suitable resources can be used  not many resources needed, so the opportunity cost is small.  As more and more is produced, less suitable resources have to be used  more resources needed  larger opportunity cost.  The opportunity cost is the positive slope of the PPF. Therefore, the PPF is always concave  Economies grow when the PPF expands, which can happen when 40 Original 35 30 With new 25 technology 20 15 10 5 0 0 10 20 30 40 50 60 There are economic growths by: 1) There are more resources 2) There are fewer resources needed per unit of production 2. Compar
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