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8/7/2019 Arnold 8e Ch 02 Final
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PaulSchneiderman,Ph.D.,ProfessorofFinance&Economics,SouthernNewHampshireUniversity
2008SouthWestern
8/7/2019 Arnold 8e Ch 02 Final
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In
This
Lecture.. AnEconomysProduction
PossibilitiesFrontier
IncreasingandConstant
OpportunityCosts TheProduction
Possibilities
Frontier
and
VariousEconomicConcepts
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In
This
Lecture..
ExchangeorTradeTransactionCostsComparative
Advantageand
Specialization
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ProductionPossibilitiesFrontier
Represents
the
possible
combinationsoftwogoodsthatcanbeproducedinacertainperiodoftimeunderthe
conditionsofagivenstateoftechnologyandfullyemployed
resources.
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ProductionPossibilitiesFrontier
ConstantOpportunityCosts
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ProductionPossibilitiesFrontier
IncreasingOpportunityCosts
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LawofIncreasingOpportunityCosts
Asmoreofagood
is
produced,
theopportunitycostsofproducingthat
goodincrease
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Increasing
OpportunityCosts
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ProductiveEfficiencyand
Inefficiency
ProductiveEfficiencyTheconditionwherethemaximumoutputis
Producedwithgivenresourcesandtechnology
ProductiveInefficiencyTheconditionwherelessthanthemaximum
outputisproducedwithgivenresourcesand
technology.Productiveinefficiencyimpliesthat
moreofonegoodcanbeproducedwithoutany
lessofanothergoodbeingproduced.
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AttainableandUnattainableRegions
andProductiveEfficiency
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EconomicGrowthwithin
aPPFFramework
Anincreaseinresources oranadvanceintechnology canincreasetheproduction
capabilitiesofaneconomy,leadingtoeconomicgrowth andshiftoutwardinthe
productionpossibilitiesfrontier.
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AdvanceinTechnology
Anadvanceintechnologycommonly
referstotheabilitytoproducemoreoutputwithafixedamountofresourcesortheabilitytoproducethesameoutputwithfewerresources.
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PPFandEconomicGrowth
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SelfTestQuestions
1. Whatdoesastraightlineproductionpossibilitiesfrontier(PPF)represent?WhatdoesabowedoutwardPPFrepresent?
2. WhatdoesthelawofincreasingcostshavetodowithabowedoutwardPPF?
3. Apoliticiansays,Ifyouelectme,wecangetmoreofeverythingwewant. Underwhat
condition(s)
is
the
politician
telling
the
truth?
4. Inaneconomy,onlyonecombinationofgoodsisproductiveefficient.Trueorfalse?Explainyouranswer.
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ExchangeorTrade
Exchange(Trade)
Theprocessofgivinguponethingforsomethingelse.
TermsofTrade
Howmuchofonethingisgivenupforhowmuchof
somethingelse.
Transaction
CostsThecostsassociatedwiththetimeandeffortneededto
searchout,negotiate,andconsummateandexchange.
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ExchangeorTrade
ThirdPartyEffects(personsnotinvolvedinthetrade)
Costs
Negative
effects
of
the
tradeBenefits Positiveeffectsofthetrade
ComparativeAdvantage
Thesituationwheresomeonecanproduceagoodat
loweropportunitycost thansomeoneelsecan.
Specialization
Producinggoodsinwhichyouhaveacomparativeadvantage
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ATimelineforTrade
ExAnte
Phrasethatmeansbefore, asinbeforeatrade.
ExPost
Phrasethatmeans
after, as
in
after
a
trade.
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ExAnte
ElizabethandBrianBeforetheTrade
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ExPost
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