Chapter 2, The production possibility model, trade, and globalization. The objectives of this chapter are: Demonstrate trade-offs with a production possibility curve; relate the concepts of comparative advantage and efficiency to the production possibility curve; state how, through comparative advantage and trade, countries can consume beyond their individual production possibilities; explain how globalization is guided by the law of one price.
Introduction: Thinking Like an Economist CHAPTER 2 The Production Possibility Model, Trade, and Globalization No one ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. — Adam Smith McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved 12 The Production Possibility Model, Trade, and Globalization Chapter Goals Ø Ø Ø Ø Demonstrate trade-offs with a production possibility curve Relate the concepts of comparative advantage and efficiency to the production possibility curve State how, through comparative advantage and trade, countries can consume beyond their individual production possibilities Explain how globalization is guided by the law of one price 22 12 The Production Possibility Model, Trade, and Globalization The Production Possibilities Model Ø Ø The production possibilities model can be presented both in a table and in a graph A production possibility table is a table that lists the trade-offs between two choices • • An output is a result of an activity An input is what you put in a production process to achieve an output 23 12 The Production Possibility Model, Trade, and Globalization The Production Possibilities Model Ø A production possibility curve (PPC) is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs • • It gives you a visual picture of the tradeoff embodied in a decision A PPC is created from a production possibility table by mapping the table in a twodimensional graph 24 12 The Production Possibility Model, Trade, and Globalization Increasing Opportunity Costs of the Trade-off The principle of increasing marginal opportunity cost tells us that opportunity costs increase the more you concentrate on the activity Butter A • • Slope is flat at A This means there is a low opportunity cost to produce more guns • B • Slope is steep at B This means there is a high opportunity cost to produce more guns Guns 25 12 The Production Possibility Model, Trade, and Globalization Comparative Advantage Ø Ø The reason we must give up more and more butter as we produce more guns is that some resources are relatively better suited to producing guns, while others are relatively better suited to producing butter A resource has a comparative advantage if it is better suited to the production of one good than to the production of another good 26 ... 12 The Production Possibility Model, Trade, and Globalization Chapter Goals Ø Ø Ø Ø Demonstrate trade-offs with a production possibility curve Relate... individual production possibilities Explain how globalization is guided by the law of one price 2 2 12 The Production Possibility Model, Trade, and Globalization The Production Possibilities Model... table that lists the trade-offs between two choices • • An output is a result of an activity An input is what you put in a production process to achieve an output 2 3 12 The Production Possibility