Lecture 3: Production, Growth, and Trade

1. Lecture 3:Production, Growth,and Trade • Define production possibility frontier • Define production efficiency • Choosing Production Mixes • An introduction to Growth • Work for the Weekend • Read Chapters 3 and 4 • Work EIA Chapter 3

2. Here are some of the issues we will address • Economic growth has made us richer than our grandparents. • Why must we still deal with scarcity? • Why are there no “free lunches?” • Why is there so much specialization and trade in the world economy?

3. The ProductionPossibility Frontier • Production is the conversion of land, labor, capital, and entrepreneurial ability into goods and services. • The production possibilities frontier (PPF) marks the boundary between those combinations of goods and services that can be produced and those that cannot-given available resources.

4. Production Possibilities Frontier TapesSoda (millions (millions of bottles Possibilityper month) per month) a 0 and 15 b 1 and 14 c 2 and 12 d 3 and 9 e 4 and 5 f 5 and 0

5. Production Possibilities Frontier 15 Soda (millions of bottles per month) 10 5 0 1 2 3 4 5 Tapes (millions per month)

6. Production Possibilities Frontier a 15 Soda (millions of bottles per month) 10 5 0 1 2 3 4 5 Tapes (millions per month)

7. Production Possibilities Frontier a 15 b Soda (millions of bottles per month) 10 5 0 1 2 3 4 5 Tapes (millions per month)

8. Production Possibilities Frontier a 15 b c Soda (millions of bottles per month) 10 5 0 1 2 3 4 5 Tapes (millions per month)

9. Production Possibilities Frontier a 15 b c Soda (millions of bottles per month) 10 d 5 0 1 2 3 4 5 Tapes (millions per month)

10. Production Possibilities Frontier a 15 b c Soda (millions of bottles per month) 10 d 5 e 0 1 2 3 4 5 Tapes (millions per month)

11. Production Possibilities Frontier a 15 b c Soda (millions of bottles per month) 10 d 5 e f 0 1 2 3 4 5 Tapes (millions per month)

12. Production Possibilities Frontier a 15 b c Soda (millions of bottles per month) 10 d 5 e f 0 1 2 3 4 5 Tapes (millions per month)

13. Production Possibilities Frontier a 15 b Unattainable c Soda (millions of bottles per month) 10 d Attainable 5 e f 0 1 2 3 4 5 Tapes (millions per month)

14. Production Possibilities Frontier a 15 b Unattainable c Soda (millions of bottles per month) 10 d Attainable 5 e z f 0 1 2 3 4 5 Tapes (millions per month)

15. Opportunity Costs • Tradeoff • Tradeoffs exist when we must give up something to get something else. • Opportunity Cost • All tradeoffs involve a cost — an opportunity cost.

16. Opportunity Costs • An opportunity cost is the highest valued alternative foregone. • Opportunity costs increase as we desire to produce more tapes. • This explains the shape of the PPF — it is bowed outward.

17. Opportunity Costs • Increasing Opportunity Cost • Opportunity costs tend to increase because not all resources are equally productive in all activities.

18. Using Resources Efficiently • Marginal cost • The opportunity cost of producing one more unit of a good or service. • The marginal cost of an additional tape is the quantity of soda that must be given up to get one more tape — the opportunity cost.

19. Opportunity Cost and Marginal Cost a 15 b c Soda (millions of bottles per month) 10 d 5 5 e f 0 1 2 3 4 5 Tapes (millions per month)

20. Opportunity Cost and Marginal Cost a 15 b c Soda (millions of bottles per month) 10 d 5 5 e f 0 1 2 3 4 5 0 1 2 3 4 5 Tapes (millions per month)

21. Opportunity Cost and Marginal Cost Increasing opportunity cost of tapes... a 15 b c Soda (millions of bottles per month) 10 d 5 5 e f 0 1 2 3 4 5 0 1 2 3 4 5 Tapes (millions per month)

22. Opportunity Cost and Marginal Cost Increasing opportunity cost of tapes... a 15 b c Soda (millions of bottles per month) 10 d 5 5 e f 0 1 2 3 4 5 0 1 2 3 4 5 Tapes (millions per month)

23. Opportunity Cost and Marginal Cost Increasing opportunity cost of tapes... a 15 b c Soda (millions of bottles per month) 10 d e 5 5 f 0 1 2 3 4 5 0 1 2 3 4 5 Tapes (millions per month)

24. Opportunity Cost and Marginal Cost Increasing opportunity cost of tapes... a 15 b c Soda (millions of bottles per month) 10 d e 5 5 f 0 1 2 3 4 5 0 1 2 3 4 5 Tapes (millions per month)

25. Opportunity Cost and Marginal Cost 5 …means increasing marginal cost of tapes. 4 Soda (millions of bottles per month) 3 2 1 0 1 2 3 4 5 Tapes (millions per month)

26. Opportunity Cost and Marginal Cost MC 5 …means increasing marginal cost of tapes. 4 Soda (millions of bottles per month) 3 2 1 0 1 2 3 4 5 Tapes (millions per month)

27. Where Should we Produce on a PPF • Any point on the curve is efficient • Some choices has implications for economic well being • How should we choose? • What Choices are best for Economic Growth?

28. The Cost of Shiftingthe Frontier • If society chooses to allocate resources toward capital investment, fewer goods and services are available for consumption today. • However, more goods and services will be produced in the future. • In General what determines how this choice is made?

29. Factors That Influence Economic Growth • Technological progress is the development of new and better ways of producing goods and services. • Capital accumulation is the growth of capital resources. • does education play a role? • does tax policy play a role?