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Module 2
Module 2
2 of 11
MODELS IN ECONOMICS
goods. 9
40
Good 2
1. EFFICIENCY IN PRODUCTION
C
To summarize …
to be efficient (no way to make anyone better off without making at least
one person worse off), an economy must produce as much of each good as
it can, given the production of other goods (efficiency in production), and it
must also produce the mix of goods that people most want to consume
(efficiency in allocation).
2. OPPORTUNITY COST: what must be given up in order to get a good.
Quantity of
Dreamliners All points under the curve are feasible (but not efficient)…
And all points above the curve are not feasible.
All points on the curve are feasible and efficient in production.
The PPF line D
30 Production Possibilities
20s = 15D
1S =3/4D
Dreamliners Small Jets
8S = 6D
30 0 1S = 3/4D
15 20
A 9 28
15
0 40
B
9
C
Each small jet has an
opportunity cost of
¾ of a Dreamliner.
20 28 40
Quantity of Small Jets
Active learning 100 100C = 200M
C = 2M
200
Suppose you are stranded on an island. Luckily, this island is rich in clams and
mangos. If you devote all of your time to harvesting clams, you can get 100
clams in a week. If you use all of your time to collect mangos, you can find
200 mangos in a week.
Assume it is possible to collect fractional amounts of both goods and draw a
sketch of your production possibility frontier for a week. (Place mangos on
the x-axis and clams on the y-axis.)
Calculate the opportunity cost of each good.
Opportunity cost of mango= ½ clams
Opportunity cost of clam = 2 mangos
ACTIVE LEARNING: PRACTICE
Dreamliners
Producing the first …requires giving up
35 20 small jets . . . 5 Dreamliners
5
PPF
0 10 20 30 40 50
Quantity of small jets
ACTIVE LEARNING: PRACTICE
A
25
20
15
10
5 Original New
PPF PPF
3. Physical capital is
manufactured
items used to
produce other
goods and
services.
FACTORS OF PRODUCTION: HUMAN CAPITAL