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Learning Objectives: The Economic Problem LO4: Understand why trade results in economies being more productive LO5: Explain the three fundamental questions and the four ways economies can be organized LO6: Use the production possibilities model to explain choice, opportunity cost, efficiency, and unemployment CHAPTER 1 1-1© 2012 McGraw-Hill Ryerson Limited

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Production Possibilities Model Production Possibilities Curve: – A graphical representation of the various combinations of maximum output that can be produced from the available resources and technology – Assumptions: Full employment Use of the best technology available Productive efficiency 1-2© 2012 McGraw-Hill Ryerson Limited LO6

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Production Possibilities Model 1-3© 2012 McGraw-Hill Ryerson Limited LO6

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Figure 1.1 Unattainable x a b c d e Wheat Cars Attainable 20 19 8 17 13 f 1024183028 LO6 © 2012 McGraw-Hill Ryerson Limited 1-4 - points on the curve represent maximum output possible with available resources

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Production Possibilities Model Scarcity – Represented by points outside the curve Choice – Represented by points on the curve (efficient) and points within the curve (inefficient) Opportunity Cost – Represented by the downward slope of the curve 1-5© 2012 McGraw-Hill Ryerson Limited LO6

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Law of Increasing Opportunity Costs – Factors of production are not equally suitable – As output increases, the per unit costs of additional units increases – Gives the production possibilities curve its bowed out shape 1-6© 2012 McGraw-Hill Ryerson Limited LO6

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Figure 1.2 a Wheat Cars 20 19 8 17 13 f 1024183028 +8 -2 b c d e +6 -4 +4 -5 Law of Increasing Opportunity Costs LO6 © 2012 McGraw-Hill Ryerson Limited 1-7 - as more cars are produced, an increasing amount of wheat must be given up

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Self-Test 5 If society produces 1000 units of butter, how many guns can it produce? If society is at “b” on the PPC, what is the cost of 1000 more units of butter? Quantity of guns per period Quantity of butter per period 400 300 150 100020003000 b c d Is opportunity cost greater for move from “c” to “d” compared to a move from “b” to “c”? © 2012 McGraw-Hill Ryerson Limited 1-8 LO6

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PPC and Economic Growth 1-9© 2012 McGraw-Hill Ryerson Limited LO6 Growth means the economy is able to produce more of everything

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PPC and Technological Change 1-10© 2012 McGraw-Hill Ryerson Limited LO6 - Improvement in technology shifts curve to PP2 - can produce more of either good, or more of both - Improvement in technology shifts curve to PP2 - can produce more of either good, or more of both

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Self-Test 6 a.Draw a PPC 1 with tools on the horizontal axis Now, assume new technology that can be used only in the tool industry is developed, which increases tool output by 50%. b. Draw a new PPC 2 that reflects this new technology c. If Finhorn produced 12 units of tools per year, how many units of grain could be produced after the introduction of the new technology © 2012 McGraw-Hill Ryerson Limited 1-11 LO6

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