Production and Trade

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Production and Trade

• Chapter 2

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There is no such thing as a free lunch

• Opportunity cost
• The value of the best alternative opportunity
  forgone
• What you give up
• Subjective
• plus utility
• Utility satisfaction or enjoyment from an action

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Resources

• Are combined to produce outputs of goods and
  services
• Inputs
• Productivity the ability of a resource to
  produce output.

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Resources

• Land natural resources in their natural state
• Labor human capital
• Human capital is acquired skills and abilities
  embodied within a person

• Capital anything that is produced in order to
  increase productivity in the future.
• Physical capital buildings, machinery, etc

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Entrepreneurship

• Is taking personal initiative to combine
  resources in productive ways
• Technology possible techniques of production

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Production Possibilities Frontier

• A model that shows the various combinations of
  two goods the economy is capable of producing
• Scarcity and choice

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Production Possibilities
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Production Possibilities

• Marginal opportunity cost which is the additional
  opportunity cost from one more unit of output

• Law of increasing cost the rise in the marginal
  opportunity cost of producing a good is more of
  that good is produced.

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Production Possibilities

• Technological efficiency
• Using the production process to the minimum waste
  of resources

• Allocative Efficiency
• Implies a specific point on the production
  possibilities frontier that is the most valuable
  combination of inputs.
• Only one point

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Economic Growth

• Production possibilities will depend on how much
  of each resource the economy has and on the
  technology that is available to make use of those
  resources.
• Assumptions
• Fixed resources
• Fixed technology

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Economic Growth

• The ability of the economy to produce more or
  better output.
• Change in technology
• Change in resource base
• Frontier shifts outward

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Production Possibilities

• The production possibilities frontier shows how
  much of one good can be produced for any feasible
  amount of another good
• If an economy is on its frontier, the opportunity
  cost of producing more of one good is less of
  another good

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Production Possibilities

• The production possibilities frontier is bowed
  outward, consistent with the law of increasing
  cost, which notes the increasing marginal
  opportunity cost of additional output
• Every point along the production possibilities
  frontier is technological efficient

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Production Possibilities

• Points inside the frontier imply some unemployed
  or misallocated resources and are thus
  inefficient
• Points outside the frontier are unattainable with
  current resources and technology
• Economies grow by acquiring resources or better
  technology, which shifts the frontier outward
• If the economy acquires resources that are
  specialized in the production of certain good,
  the production possibilities frontier expands
  outward

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Circular Flow of Economic Activity

• Money a medium of exchange that removes the
  need for barter, also a measure of value and a
  way to store value of time

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Barter

• The exchange of goods and services directly for
  one another, without the use of money

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Circular Flow

• A model of economy that depicts how the flow of
  money facilitates a counter flow of resources,
  goods, and services in the input and output
  markets

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Market

• Output market
• The market where goods and services are bought
  and sold

• Input market
• The market where resources are bought and sold

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Circular Flow
Output Market
Money
Input Market
Goods
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Comparative Advantage

• The ability to produce a good at a lower
  opportunity cost (other goods forgone) than
  others could do
• Produce the good with lowest opportunity cost and
  trade for good for highest opportunity cost
• Buy cheap gt Sell dear
• Example

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Absolute Advantage

• The ability to produce a good with fewer
  resources than other producers.
• To gain from trade, specialize according to
  comparative advantage, whether or not you have
  any absolute advantage

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Trade

• Countries gain from trade whether or not they
  have an absolute advantage in anything

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Trade

• Exports - Goods and services a country sells to
  other countries
• Imports goods and services a country buys from
  other countries

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Trade

• Through trade, a country can consume a
  combination of goods and services that lies
  outside its production possibilities frontier,
  meaning the countrys consumption possibilities
  will exceed its production possibilities.
• example

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Example