Textbook Notes (367,979)
United States (205,929)
Economics (193)
ECON 102 (58)
Chapter 2

ECON 102 Chapter 2.docx

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Department
Economics
Course
ECON 102
Professor
Logan Mc Leod
Semester
Summer

Description
Chapter 2 Production Possibilities Production Possibilities Curve (PPC) - A graph representing all possible combinations of maximum outputs that could be produced assuming a fixed amount of resources of a given quality Opportunity Cost - The value of the next best alternative that we give up or forego when we make a decision *Example: Summer School Class ● Tuition (In-state) = $1944 ● Books = $200 ● Foregone Wages $10/hr x 40 hrs x 7 weeks = $2800 ● Total opportunity cost = $4944 Sunk Costs: (Money that cannot get back no matter what the decision is) - should not be considered when making a decision PPC Example: Capital Goods Consumer Goods Marginal Opportunity Cost 740 0 0 700 100 40 650 200 50 580 300 70 500 400 80 400 500 100 0 600 400 Assumptions about the PPC ● Resources are fully employed ● Production takes place over a fixed period of time ● Resources are fixed ● Technology is fixed PPC facts ● Points outside the PPC not feasible ● Points inside are feasible and reasons for it are... ○ Resources are not fully employed ○ Using our resources inefficiently *Reasons for Shifts of the PPC* ● change in resources ● change in technology Main Points about the PPC: ● PPC is downward: this represents opportunity cost ● PPC is bowed out: this represents the Law of Increasing Additional Cost (or Law of Increasing Marginal Opportunity Cost) ● Points inside the PPC: represents unemployment or not using all of our other resources or using our resources inefficiently ● Points outside the PPC are not feasible: We can represent economic growth by shifts of the PPC Absolute and Comparative Advantage Absolute Advantage - One country has an Absolute Advantage in the production of a good over another country if it can produce a given amount of a good using fewer resources New Zealand Australia Wheat 6 2 Cotton 2 6 * units = yield per acre* * Each country has 100 acres* * Each country wants an equal amount of each good* Without Trade: New Zealand 25 acres x 6 wheat/acres = 150 wheat 75 acres x 2 cotton/acres = 150 cotton Without Trade: Australia 75 acres x 2 wheat/acres = 150 wheat 25 acres x 6 cotton/acres = 150 cotton With Trade New Zealand: 100 acr
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