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topic 2 - Gains from Trade.pdf

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Topic 2Gains from TradeththWeek Two Sep 20Sep 24thSep 20Comparative AdvantageSpecialization2 PPFProduction Possibility Frontier s a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technologyeg1 Gumdrops and Chocolates Assume a society can only produce gumdrops and chocolatesPPF of Gumdrops and Chocolates Gumdrops i Production Possibilities Gumdrops Chocolates 10 10 0 unattainable 8 1 6 6 2 4 3 2 4 attainable 0 5 25ChocolatesInsights Calculate OC a Cause of PPF scarcity of resourcesOC of one gumdrop is 05 chocolateb Result of PPF tradeoff5 chocolates10 gumdrops05 CG c Slope of PPF Opportunity Cost OC of one chocolate is 2 gumdrops10 gumdrops5 chocolates2 GCThe opportunity cost slope and shape of the PPF a For now always assume constant opportunity cost which means PPF is always linear b In the economy opportunity cost is not always linear but depends on how many of each product is being produced As we produce more and more of any particular good the opportunity cost per unit tends to rise because resources are specialized ie recourses are not equally well suited for producing each output it also means that tradeoffs between the production of any two goods are not constant Therefore PPF always bends outward Mankiw study guide pg1314
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