1. Production Possibilities Curve/Frontier-

2. Ireland Puerto Rico Crystal Rum Crystal Rum A B C 1 million 0
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Crystal Rum
Crystal Rum A B C
1 million
700,000 30,000
,000 A B C
80,
40,000 40,000
0 80,000

3. Crystal
Crystal A
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Which country has the absolute advantage in the production
of Crystal? In the production of Rum?
What did I tell you to do with absolute advantages?
KICK IT OUT THE DOOR!!!

4. Which country has the comparative advantage in Crystal? In Rum?
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Which country has the comparative advantage in Crystal?
In Rum?

5. Crystal
Crystal A
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
There are___steps in figuring out which country has
the comparative advantage. 5

6. Ireland 1. Know the definition of comparative advantage
Rum
Crystal
1 million
100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C
1. Know the definition of comparative advantage
One entity can produce something at a LOWER MARGINAL OPPORTUNITY
COST than another entity.
2. Set up a table:
Ireland Puerto Rico
1 Rum = __Crystal Rum = __Crystal
1 Crystal = __ Rum Crystal = __Rum
3. Go to the Xtremes (X and Y Games)

7. Ireland Puerto Rico 1. Know the definition of comparative advantage
Rum
Crystal
1 million
100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C
Puerto Rico
1. Know the definition of comparative advantage
Ireland Puerto Rico
1 Rum = __Crystal Rum = __Crystal
1 Crystal = ____ Rum Crystal = __Rum
2. Set up a table: 10 1
1/10 1
3. Go to the Xtremes (X and Y Games)
4. Fill in the blanks (starting with Puerto Rico first)
5. Circles and Arrows

8. Rum
Crystal
1 million
100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C
Puerto Rico
We decided that Ireland should produce ALL the crystal and
Puerto Rico should produce ALL the rum. How much crystal should
Ireland produce?
1 million cases
How much rum should Puerto Rico produce?
80,000 barrels
Should Ireland just hold onto its cases of crystal and Puerto Rico just
hold onto its barrels of rum?
NO!
What should each country do after specialization?
Trade

9. Ireland Puerto Rico IRELAND PUERTO RICO Rum Crystal 1 million 100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C
Puerto Rico
Consumes Consumes
after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
IRELAND
C 1 million ,000
R ,000
825,000
700,000
+125,000
35,000
30,000
+ 5,000
PUERTO RICO C
R ,000
+175,000
175,000
40,000
+135,000
-35,000
45,000
40,000
+5,000

10. Ireland Puerto Rico IRELAND PUERTO RICO 175,000 D Rum Crystal
1 million
100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C D
825,000
35,000
Puerto Rico
Consumes Consumes
after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
IRELAND
Plot
this
column
C 1 million ,000
R ,000
825,000
700,000
+125,000
35,000
30,000
+ 5,000
PUERTO RICO C
R ,000
+175,000
175,000
40,000
+135,000
-35,000
45,000
40,000
+5,000

11. Both Countries are!!! Ireland
175,000 D
Rum
Crystal
1 million
100,000
700,000
30,000 A B C
Ireland
Rum
Crystal
80,000
40,000 A B C D
825,000
35,000
45,000
Puerto Rico
Which country is obviously better off through this
specialization and trade--Ireland or Puerto Rico?
Both Countries are!!!
Both countries are now outside their own production
capabilities. Through specialization and trade all
parties are better off.

12. Click here for next slide.

13. Production Possibilities Curve for Atlantis
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40

14. Assume that two countries, Atlantis and
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
Assume that two countries, Atlantis and
Xanadu, have equal amounts of resources.
Atlantis can produce 30 cars or 10 tractors or
any combination, as shown by the line MN in
the figure above. Xanadu can produce 20 cars
or 40 tractors or any combination, as shown
by the line PQ in the figure above.

15. (a) Which country has an absolute advantage in
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
(a) Which country has an absolute advantage in
the production of tractors? Explain how you
determined your answer.

16. (b) Which country has a comparative advantage
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
(b) Which country has a comparative advantage
in the production of cars? Using the concept
of opportunity costs, explain how you
determine your answer.

17. (c) If the two countries specialize and trade with
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
(c) If the two countries specialize and trade with
each other, which country will import cars?
Explain why.

18. (d) If the terms of trade are such that one car can
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
(d) If the terms of trade are such that one car can
be exchanged for one tractor, explain how
Atlantis will benefit from such trade.

19. Assume that two countries, Atlantis and
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
Assume that two countries, Atlantis and
Xanadu, have equal amounts of resources.
Atlantis can produce 30 cars or 10 tractors or
any combination, as shown by the line MN in
the figure above. Xanadu can produce 20 cars
or 40 tractors or any combination, as shown
by the line PQ in the figure above.

20. (a) Which country has an absolute advantage in
Cars M 30
Production Possibilities Curve for
Atlantis P 20
Production Possibilities
Curve for Xanadu Q N
Tractors 10 40
(a) Which country has an absolute advantage in
the production of tractors? Explain how you
determined your answer.
Xanadu has the absolute advantage in tractors.
It can produce more tractors than Atlantis.

21. (b) Which country has a comparative advantage
Atlantis
1car = __ trac.
1 trac = __ cars
Cars
1/3 M 3 30
Production Possibilities Curve for
Atlantis P
Xanadu
1 car = __ trac.
1 trac = __ cars 20
Production Possibilities
Curve for Xanadu 2
1/2 Q N
Tractors 10 40
(b) Which country has a comparative advantage
in the production of cars? Using the concept
of opportunity costs, explain how you
determine your answer.
Atlantis has the comparative advantage in cars.
It’s marginal opportunity cost of producing a car
is less than Xanadu’s (1/3 trac. compared to ½).

22. (c) If the two countries specialize and trade with
Atlantis
1car = __ trac.
1 trac = __ cars
Cars
1/3 M 30
Production Possibilities Curve for
Atlantis 3 P
Xanadu
1 car = __ trac.
1 trac = __ cars 20
Production Possibilities
Curve for Xanadu 2
1/2 Q N
Tractors 10 40
(c) If the two countries specialize and trade with
each other, which country will import cars?
Explain why.
Xanadu should import cars. The opportunity
cost of producing a car in Xanadu is too high. It
would have to give up the production of 2 tractors.

23. (d) If the terms of trade are such that one car can
Atlantis
1car = __ trac.
1 trac = __ cars
Cars
1/3 M 30
Production Possibilities Curve for
Atlantis 3 P
Xanadu
1 car = __ trac.
1 trac = __ cars 20
Production Possibilities
Curve for Xanadu 2
1/2 Q N
Tractors 10 40
(d) If the terms of trade are such that one car can
be exchanged for one tractor, explain how
Atlantis will benefit from such trade.
If Atlantis were to produce its own tractors,
it would have to give up the production of 3 cars. By
trading 1 tractor for 1 car, this is a good terms of trade
because Atlantis gets to a point outside its own PP curve.

24. Mars
Venus
Food Clothing
Food Clothing * *

25. Mars
Venus
Food Clothing
Food Clothing * *
Constant or Increasing?

26. Mars
Venus
Food Clothing
Food Clothing * *
Absolute Advantage?

27. Mars
Venus
Food Clothing
Food Clothing * *
Comparative Advantage?

28. PP Curve Interactive, Part II

29. SUPPLY
DEMAND

34. Plot the following:
Price
Quantity Demanded P Qd $9 2 8 3 7 5 6 9

35. Qd D To be on the demand curve a person must be WILLING and ABLE to
Price
Quantity Demanded P Qd $9 2 8 3 7 5 6 9 P 9 Qd
just a point on the
curve.
To be on the
demand curve
a person must
be WILLING
and ABLE to
purchase the
product or service. 8 7 6 D
is the entire
curve. 2 3 5 9 Q

36. Qd D There is an ___________ inverse relationship between price
Quantity Demanded P Qd $9 2 8 3 7 5 6 9 P 9 Qd
just a point on the
curve.
There is an
___________
relationship
between price
and quantity. 8
inverse 7 6 D
is the entire
curve. 2 3 5 9 Q

37. D Definitions: Quantity demanded--it is the amount that will be9 8 7 6 D 2 3 5 9 Q
Definitions:
Quantity demanded--it is the amount that will be
purchased at a specific P.
Demand--it is a schedule of quantities of goods and
services that will be purchased at various prices
at a specified time, all other things held constant.

38. 9 8 7 6 D 2 3 5 9 Q

39. Price DOES NOT CHANGE DEMAND!!!!!!!! Price changes Quantity Demanded9 Qd
just a point on the
curve. 8 7 6 D
is the entire
curve. 2 3 5 9 Q
Price changes Quantity Demanded
Price DOES NOT CHANGE
DEMAND!!!!!!!!

40. Only one variable Qd
PRICE
PRICE DOES NOT
DEMAND!!

41. 8 GUESS HOW MANY DETERMINANTS OF DEMAND THERE ARE?
And if you don’t memorize these variables, YOU
WILL FAIL THIS CLASS!!
ARE THERE ANY QUESTIONS?

42. Eight Determinants of Demand:
1. # of consumers

43. 6
$36.95

46. Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
As people’s incomes go up demand for
normal goods increases. As people’s income
go down, demand for normal goods
decrease.
3. Income--Inferior Goods
As people’s incomes go up demand for
inferior goods decreases. As people’s income
go down, demand for inferior goods
increases.

48. ______Used Furniture Store
______Lazy Boy Store

49. $25

52. Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences

55. Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes

57. Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
6. Price of related products: Complements

59. Eight variables that shift Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
6. Price of related products: Complements
7. Expected future P’s by consumers
8. Expected future Y by consumers

60. SUPPLY

61. S Definitions: Quantity supplied--it is the amount that will be
sold at a specific P.
Supply--it is a schedule of quantities of goods and
services that will be sold at various prices
at a specified time, all other things held constant.

62. 5 GUESS HOW MANY DETERMINANTS OF SUPPLY THERE ARE?
And if you don’t memorize these variables, YOU
WILL FAIL THIS CLASS!!
ARE THERE ANY QUESTIONS?

63. Five determinants of Supply:
1. # of suppliers
2. Costs
3. Physical Availability of Resources
4. Technology
5. Expected Future Prices by Consumer