1. Lecture 3: Production, Growth, and Trade  Define production possibility frontier  Define production efficiency  Choosing Production Mixes  An introduction to Growth  Work for the Weekend  Read Chapters 3 and 4  Work EIA Chapter 3

2. Here are some of the issues we will address  Economic growth has made us richer than our grandparents.  Why must we still deal with scarcity?  Why are there no “free lunches?”  Why is there so much specialization and trade in the world economy?

3. The Production Possibility Frontier  Production is the conversion of land, labor, capital, and entrepreneurial ability into goods and services.  The production possibilities frontier (PPF) marks the boundary between those combinations of goods and services that can be produced and those that cannot- given available resources.

4. Tapes Soda (millions (millions of bottles Possibility per month) per month) Production Possibilities Frontier a 0and15 b1and14 c2and12 d3and 9 e4and 5 f5and 0

5. Production Possibilities Frontier Tapes (millions per month) Soda (millions of bottles per month) 012345012345 5 10 15

6. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 a Soda (millions of bottles per month)

7. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 a b Soda (millions of bottles per month)

8. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 b c Soda (millions of bottles per month) a

9. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 a b c d Soda (millions of bottles per month)

10. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 a b c d e Soda (millions of bottles per month)

11. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 15 a b c d e f Soda (millions of bottles per month) 10

12. Production Possibilities Frontier Tapes (millions per month) 012345012345 5 10 15 a b c d e f Soda (millions of bottles per month)

13. Production Possibilities Frontier Attainable Unattainable Tapes (millions per month) 012345012345 5 10 15 a b c d e f Soda (millions of bottles per month)

14. Production Possibilities Frontier Soda (millions of bottles per month) Attainable Unattainable Tapes (millions per month) 012345012345 5 10 15 a b c d e f z

15. Opportunity Costs  Tradeoff  Tradeoffs exist when we must give up something to get something else.  Opportunity Cost  All tradeoffs involve a cost — an opportunity cost.

16. Opportunity Costs  An opportunity cost is the highest valued alternative foregone.  Opportunity costs increase as we desire to produce more tapes.  This explains the shape of the PPF — it is bowed outward.

17. Opportunity Costs  Increasing Opportunity Cost  Opportunity costs tend to increase because not all resources are equally productive in all activities.

18. Using Resources Efficiently  Marginal cost  The opportunity cost of producing one more unit of a good or service.  The marginal cost of an additional tape is the quantity of soda that must be given up to get one more tape — the opportunity cost.

19. Opportunity Cost and Marginal Cost Tapes (millions per month) 5 10 15 a b c d e f Soda (millions of bottles per month) 012345012345 5

20. Opportunity Cost and Marginal Cost Tapes (millions per month) 012345012345 5 10 15 a b c d e f Soda (millions of bottles per month) 012345012345 5

21. Opportunity Cost and Marginal Cost a Tapes (millions per month) 012345012345 5 10 15 b c d e f Soda (millions of bottles per month) Increasing opportunity cost of tapes... 012345012345 5

22. Tapes (millions per month) 012345012345 5 10 15 a b c d e f Soda (millions of bottles per month) 012345012345 5 Opportunity Cost and Marginal Cost Increasing opportunity cost of tapes...

23. Opportunity Cost and Marginal Cost Tapes (millions per month) 012345012345 5 10 15 a b c d f 012345012345 5 Soda (millions of bottles per month) Increasing opportunity cost of tapes... e

24. Opportunity Cost and Marginal Cost Tapes (millions per month) 012345012345 5 10 15 a b c d e f 012345012345 5 Soda (millions of bottles per month) Increasing opportunity cost of tapes...

25. Opportunity Cost and Marginal Cost Tapes (millions per month) 012345012345 Soda (millions of bottles per month) 1 2 3 4 5 …means increasing marginal cost of tapes.

26. Tapes (millions per month) 012345012345 1 2 3 4 5 MC Opportunity Cost and Marginal Cost Soda (millions of bottles per month) …means increasing marginal cost of tapes.

27. Where Should we Produce on a PPF  Any point on the curve is efficient  Some choices has implications for economic well being  How should we choose?  What Choices are best for Economic Growth?

28. The Cost of Shifting the Frontier  If society chooses to allocate resources toward capital investment, fewer goods and services are available for consumption today.  However, more goods and services will be produced in the future.  In General what determines how this choice is made?

29. Factors That Influence Economic Growth  Technological progress is the development of new and better ways of producing goods and services.  Capital accumulation is the growth of capital resources.  does education play a role?  does tax policy play a role?