Production Possibilities Curve/Frontier

1. - Production Possibilities Curve/Frontier

2. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico Crystal Rum Crystal Rum A B C 1 million 0 700,000 30,000 0 100,000 A B C 80,000 0 40,000 40,000 0 80,000

3. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico Which country has the absolute advantage in the production of Crystal? In the production of Rum? What did I tell you to do with absolute advantages? KICK IT OUT THE DOOR!!!

4. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico Which country has the comparative advantage in Crystal? In Rum?

5. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico There are___steps in figuring out which country has the comparative advantage. 5

6. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland 1. Know the definition of comparative advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY COST than another entity. 2. Set up a table: Ireland Puerto Rico 1 Rum = __Crystal 1 Rum = __Crystal 1 Crystal = __ Rum 1 Crystal = __Rum 3. Go to the Xtremes (X and Y Games)

7. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico 1. Know the definition of comparative advantage Ireland Puerto Rico 1 Rum = __Crystal 1 Rum = __Crystal 1 Crystal = ____ Rum 1 Crystal = __Rum 2. Set up a table: 10 1 1/10 1 3. Go to the Xtremes (X and Y Games) 4. Fill in the blanks (starting with Puerto Rico first) 5. Circles and Arrows

8. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico We decided that Ireland should produce ALL the crystal and Puerto Rico should produce ALL the rum. How much crystal should Ireland produce? 1 million cases How much rum should Puerto Rico produce? 80,000 barrels Should Ireland just hold onto its cases of crystal and Puerto Rico just hold onto its barrels of rum? NO! What should each country do after specialization? Trade

9. Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland Puerto Rico Consumes Consumes after specialization before Trade Produces Trades and Trade (Point B) Gain from Trade IRELAND C 1 million -175,000 R 0 +35,000 825,000 700,000 +125,000 35,000 30,000 + 5,000 PUERTO RICO C 0 R 80,000 +135,000 +175,000 175,000 40,000 -35,000 45,000 40,000 +5,000

10. D 175,000 Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland D 825,000 35,000 Puerto Rico Consumes Consumes after specialization before Trade Produces Trades and Trade (Point B) Gain from Trade IRELAND Plot this column C 1 million -175,000 R 0 +35,000 825,000 700,000 +125,000 35,000 30,000 + 5,000 PUERTO RICO C 0 R 80,000 +135,000 +175,000 175,000 40,000 -35,000 45,000 40,000 +5,000

11. 175,000 D Crystal Crystal A 1 million B 700,000 A 80,000 B 40,000 C C 0 30,000 100,000 Rum 0 40,000 80,000 Rum Ireland D 825,000 35,000 45,000 Puerto Rico Which country is obviously better off through this specialization and trade--Ireland or Puerto Rico? Both Countries are!!! Both countries are now outside their own production capabilities. Through specialization and trade all parties are better off.

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13. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40

14. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.

15. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 (a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.

16. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 (b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer.

17. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 (c) If the two countries specialize and trade with each other, which country will import cars? Explain why.

18. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 (d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.

19. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.

20. Cars M Production Possibilities Curve for Atlantis 30 P 20 Production Possibilities Curve for Xanadu Q N Tractors 10 40 (a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer. Xanadu has the absolute advantage in tractors. It can produce more tractors than Atlantis.

21. Atlantis 1car = __ trac. 1 trac = __ cars Cars 1/3 M Production Possibilities Curve for Atlantis 30 3 P Xanadu 1 car = __ trac. 1 trac = __ cars 20 Production Possibilities Curve for Xanadu 2 1/2 Q N Tractors 10 40 (b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer. Atlantis has the comparative advantage in cars. It’s marginal opportunity cost of producing a car is less than Xanadu’s (1/3 trac. compared to ½).

22. Atlantis 1car = __ trac. 1 trac = __ cars Cars 1/3 M Production Possibilities Curve for Atlantis 30 3 P Xanadu 1 car = __ trac. 1 trac = __ cars 20 Production Possibilities Curve for Xanadu 2 1/2 Q N Tractors 10 40 (c) If the two countries specialize and trade with each other, which country will import cars? Explain why. Xanadu should import cars. The opportunity cost of producing a car in Xanadu is too high. It would have to give up the production of 2 tractors.

23. Atlantis 1car = __ trac. 1 trac = __ cars Cars 1/3 M Production Possibilities Curve for Atlantis 30 3 P Xanadu 1 car = __ trac. 1 trac = __ cars 20 Production Possibilities Curve for Xanadu 2 1/2 Q N Tractors 10 40 (d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade. If Atlantis were to produce its own tractors, it would have to give up the production of 3 cars. By trading 1 tractor for 1 car, this is a good terms of trade because Atlantis gets to a point outside its own PP curve.

24. Mars Venus Food Clothing Food Clothing 0 30 2 24 4 18 5 12* 8 6 10 0 0 40 4 32 8 24* 12 16 16 8 20 0

25. Mars Venus Food Clothing Food Clothing 0 30 2 24 4 18 5 12* 8 6 10 0 0 40 4 32 8 24* 12 16 16 8 20 0 Constant or Increasing?

26. Mars Venus Food Clothing Food Clothing 0 30 2 24 4 18 5 12* 8 6 10 0 0 40 4 32 8 24* 12 16 16 8 20 0 Absolute Advantage?

27. Mars Venus Food Clothing Food Clothing 0 30 2 24 4 18 5 12* 8 6 10 0 0 40 4 32 8 24* 12 16 16 8 20 0 Comparative Advantage?

28. PP Curve Interactive, Part II

29. SUPPLY DEMAND

34. Plot the following: Price Quantity Demanded Qd P $9 2 8 3 5 7 6 9

35. Price Quantity Demanded Qd P $9 2 8 3 5 7 6 9 P Qd 9 just a point on the curve. To be on the demand curve a person must be WILLING and ABLE to purchase the product or service. 8 7 6 D is the entire curve. 2 3 9 5 Q

36. Price Quantity Demanded Qd P $9 2 8 3 5 7 6 9 P Qd 9 just a point on the curve. There is an ___________ relationship between price and quantity. 8 inverse 7 6 D is the entire curve. 2 3 9 5 Q

37. 9 8 7 6 D 2 3 9 5 Q Definitions: Quantity demanded--it is the amount that will be purchased at a specific P. Demand--it is a schedule of quantities of goods and services that will be purchased at various prices at a specified time, all other things held constant.

38. 9 8 7 6 D 2 3 9 5 Q

39. Qd 9 just a point on the curve. 8 7 6 D is the entire curve. 2 3 9 5 Q Price changes Quantity Demanded Price DOES NOT CHANGE DEMAND!!!!!!!!

40. Only one variable Qd PRICE PRICE DOES NOT DEMAND!!

41. GUESS HOW MANY DETERMINANTS OF DEMAND THERE ARE? 8 And if you don’t memorize these variables, YOU WILL FAIL THIS CLASS!! ARE THERE ANY QUESTIONS?

42. Eight Determinants of Demand: 1. # of consumers

43. 6 $36.95

46. Eight Determinants of Demand: 1. # of consumers 2. Income--Normal Goods As people’s incomes go up demand for normal goods increases. As people’s income go down, demand for normal goods decrease. 3. Income--Inferior Goods As people’s incomes go up demand for inferior goods decreases. As people’s income go down, demand for inferior goods increases.

48. ______Used Furniture Store ______Lazy Boy Store

49. $25