Click here for ANSWERS TO SELECTED QUESTIONS
IN THE TEXT
Powerpoint presentation of Main Points from Chapter 3
Similarly, you could graph your BUDGET
A production possibilities frontier (or PPF) is similar -- it shows the combinations of goods that the economy can produce with its limited resources and technology.
Points ON the PPF(like A-E) are technically efficient.
Points below the PPF (like G) are technically inefficient because
the economy could produce more -- for example, the economy has more of
both goods at point C than at point G.
Technological advances and increases in the resources (capital, labor,
etc.) available to the economy shift the PPF outward like this:
The absolute value of the PPF's slope shows the opportunity
cost of producing the good on the X-axis.
Trade, like technological change, expands consumption
opportunities.
Remember the fable of the brilliant businesswoman who built a great
factory by the sea...
see pages 50-51.
Two-Student Example
Two students have 12 hours each to spend working.
There are two tasks: walls and windows.
There are many walls and windows that need fixing.
Here is the time it takes them for each task:
| Time required to: | Lauren | Steve |
| Fix one WALL | 3 hours | 2 hours |
| Fix one WINDOW | 1 hour | 4 hours |
The table above implies that their opportunity costs are:
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Without trade, Lauren's PPF, on
page 52, allows her to fix 2 walls and 6 windows (Point L1 on page 52).
Steve's PPF, on page 52, allows him to
fix 2 walls and 2 windows (Point S1 on page 52).
With trade, so that Steve works only on walls and Lauren works only on windows, they can produce more (i.e. fix more walls and windows). Together, their PPF (in Figure 6 on page 52) shows that they can fix a total of 6 walls and 12 windows. They can share this output -- for example, Lauren might get 3 fixed walls and 9 fixed windows (Point L2 in Figure 6 on page 52) -- which is more than she could produce on her own. And Steve might get the other 3 fixed walls and 3 fixed windows (Point S2 in Figure 6 on page 52) -- which is more than he could produce on his own. By trading, they can each get more than they could produce on their own. In that sense, trading is like an improvement in technology.
By modifying the
example as on pages 55-56, we can give Lauren an absolute advantage (like
Lisa has in the shoe-store example of chapter 1). the result -- even
if one person has an absolute advantage, both people can still gain from
a trade. People gain from trade when their opportunity costs differ
(as inthe table above).
Copyright, 2000, Alan C. Stockman