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Susan’s Production Possibilities

Opportunity Cost (OC) 1. OC nuts = Loss in coffee/gain in nuts 2. OC coffee = Loss in nuts/gain in coffee. A. 24. B. 16. Production Possibilities Curve: All combinations of coffee and nuts that can be produced with Susan’s labor. C. 8. D. 4. 8. 12.

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Susan’s Production Possibilities

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  1. Opportunity Cost (OC) • 1. OC nuts = Loss in coffee/gain in nuts • 2. OC coffee = Loss in nuts/gain in coffee A 24 B 16 Production Possibilities Curve: All combinations of coffee and nuts that can be produced with Susan’s labor C 8 D 4 8 12 Susan’s Production Possibilities Coffee (lb/day) Nuts (lb/day) 0 Chapter 2: Comparative Advantage: The Basis for Exchange

  2. Coffee (lb/day) A 24 B 16 C 8 D Nuts (lb/day) 0 4 8 12 Susan’s Production Possibilities The scarcity principle: Having more of one good generally means having less of another good. Chapter 2: Comparative Advantage: The Basis for Exchange

  3. Attainable and Efficient Points on Susan’s Production Possibilities Coffee (lb/day) A 24 Combination F: Unattainable B 16 Combination E: Inefficient C 8 Combinations A, B, C, and D: Efficient D Nuts (lb/day) 0 4 8 12 Chapter 2: Comparative Advantage: The Basis for Exchange

  4. Tom’s Production Possibilities Curve: All combinations of coffee and nuts that can be produced with Tom’s labor A 12 B 8 C 4 D 8 16 24 Tom’s Production Possibilities Tom’s Production Possibilities Curve for a 6 hour day Coffee (lb/day) Nuts (lb/day) 0 How Individual Productivity Affects the Slope and Position of the Production Possibilities Curve Chapter 2: Comparative Advantage: The Basis for Exchange

  5. Susan has an absolute and comparative advantage in picking coffee 24 Susan’s Production Possibilities Curve Tom has an absolute and comparative advantage in picking nuts 12 Tom’s Production Possibilities Curve 12 24 Individual Production Possibilities Curves Compared Coffee (lb/day) Nuts (lb/day) 0 Chapter 2: Comparative Advantage: The Basis for Exchange

  6. Tom’s Output = 2 hrs picking nuts = 8 lbs 4 hrs picking coffee = 8 lbs Coffee (lb/day) 24 Susan’s Production Possibilities Curve Susan’s Output = 2 hrs picking coffee = 8 lbs 4 hrs picking nuts = 8 lbs Total Output = 16 lbs each 12 B Tom’s Production Possibilities Curve 8 Nuts (lb/day) 0 8 12 24 Assume: Susan and Tom allocate their time so each person’s output is half nuts and half coffee Production Without Specialization Chapter 2: Comparative Advantage: The Basis for Exchange

  7. Tom’s comparative advantage is in nuts so he specializes in nuts and produces 24 lbs Coffee (lb/day) 24 Susan’s Production Possibilities Curve Susan gives Tom 12 lbs of coffee for 12 lbs of nuts E 12 Susan’s comparative advantage is in coffee so she specializes in coffee and produces 24 lbs Tom’s Production Possibilities Curve Nuts (lb/day) 0 12 24 Production With Specialization Chapter 2: Comparative Advantage: The Basis for Exchange

  8. A 100 B Why would the Production Possibilities Curve have an outward bow? C 95 90 D 20 E 15 20 30 75 80 77 Production PossibilitiesCurve For a Large Economy Assume: An economy that produces only two goods, coffee and nuts Coffee (1000s of lb/day) Nuts (1000s of lb/day) Chapter 2: Comparative Advantage: The Basis for Exchange

  9. Factors Shifting the PPC 1. Increases in productive resources (i.e., labor or capital) 2. Improvements in knowledge and technology New PPC Original PPC Economic Growth: An Outward Shift in the Economy’s PPC Coffee (1000s of lb/day) Nuts (1000s of lb/day) Chapter 2: Comparative Advantage: The Basis for Exchange

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