Illustration of scarcity and opportunity cost

1
Chapter 3

• Illustration of scarcity and opportunity cost
• Dealing with scarcity in a market economy
• Opportunity cost and international trade

2
Production Possibilities Frontier
A
Unattainable
Energy Production
B
Attainable
Environmental Quality
3
Production Possibilities Frontier
D
A
Energy Production
B
C
Environmental Quality
4
Production Possibilities Frontier and Growth
Energy Production
Environmental Quality
5
Production Possibilities Frontier and Growth
Energy Production
Environmental Quality
6
Increasing Opportunity Costs
A
B
Energy Production
C
D
Environmental Quality
Point A B C D EP 10 9 5 0 EQ 0 4 9 10
7
Calculation of Opportunity Costs
Point EP EQ Cost of one unit Cost of one
of EQ in terms unit of EP in of
EP terms of EQ A 10 0 ----
4/1 B 9 4 1/4 5/4 C 5 9 4/5
1/5 D 0 10 5/1 ----
8
Production Possibilities and Efficiency
A
B
Energy Production
A, B, and C are all technically efficient. Only
one point can exhibit allocative efficiency
C
Environmental Quality
9
Allocative Efficiency
Marginal Benefit Curve
Cost
Marginal Cost Curve
Energy Production
10
Allocative Efficiency and PPF
Energy Production
B
Environmental Quality
Cost
MC
MB
Environmental Quality
11
Opportunity Cost, Comparative Advantage, and
Specialization

• In County A, the opportunity cost of producing
  one more unit of wine is 5 loaves of bread
• In County B, the opportunity cost of producing on
  more unit of wine is 8 loaves of bread

12
Opportunity Cost, Comparative Advantage, and
Specialization

• Suppose that Country A has enough resources to
  produce 3 units of wine or 15 loaves of bread
• Suppose that Country B has enough resources to
  produce 2 units of wine or 16 loaves of bread

13
Trade and Comparative Advantage
Wine
3
A
Trade Line
2
B
1
16
15
Bread
14
Trade and Absolute Advantage

• Suppose that Country A and Country B have the
  same amount of resources as before, but now
  Country A becomes 5 times more productive
• A can now produce 15 bottles of wine or 75 loaves
  of bread

15
Trade and Absolute Advantage

• Has Country A anything to gain from trading with
  (its poor cousin) Country B?
• Cost of a bottle of wine in Country A is still 5
  loaves of bread. Cost of a bottle of wine in
  Country B is still 8 loaves of bread.

16
Consider the following production possibility
table
Point Cars Computers A 0 20 B 1 19 C 2 15
D 3 9 E 4 0
17
Do the following

• Draw a production possibilities frontier using
  the points provided.
• Also, show an attainable point and a unattainable
  point. Interpret each.
• Calculate the cost of a one unit increase in
  computer production (in terms of foregone output
  of cars) along the interval C to B.
• In your PPF diagram, show the effect of
  technological progress in computers only.