ECON 1B03 Chapter Notes - Chapter 2: Absolute Advantage, Comparative Advantage, Bp Canada
12 Jun 2018
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ECON 1B03: Chapter 2
Book notes: 29/Sep/2017
| 1
Chapter 2: Production Possibilities and Gains from Trade
Main Concepts and Definitions:
• Limited resources available to produce goods and services at a period of time.
• Resource endowment: a list of all available resources an economy has that any given time
• The resources are what technology makes available for us
To determine:
• What is the best the economy can do in terms of how much it can produce, given its
resource endowment and technology?
Possibilities and graph combinations:
• When: the economy is using all of its resources and its current technology
• To graph these combinations:
o Can only have two goods, each one is on an axis
• Production possibilities frontier, PPF: the graph of different combinations of goods an
economy can produce using all its resources efficiently given its current technology
o For short: it shows the best an economy can do at a specific moment
• If we are producing X amount of good A and Y amount of good B, in order to produce
more of Good A,
• we have to give up some of Good B.
o The PPF will show opportunity costs- how much of one good we have to give up
producing more of the other good, it’s time for an example.
❖ Example: Westdale
• Can produce two goods, smartphones and trucks. The
following table explains four combinations of phones
and trucks that can be produced if it uses all its
resources efficiently given its current technology
• If it only gives its resources to producing phones, then it cannot produce any trucks.
If it wants only 5000 phones, then the left products can produce 700 trucks, etc.
therefore, moving resources from one product to another allows that product to be
made more.
Phones
Trucks
A
8000
0
B
6000
500
C
5000
700
D
0
1100
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ECON 1B03: Chapter 2
Book notes: 29/Sep/2017
| 2
• Moving A to B: to get 500 trucks, give up 2000 phones.
To get 1 truck, give up 2000/500= 4 phones
The OC pf a truck is 4 phones, moving from A to B
• Moving B to C: to get 200 trucks, give up 1000 phones.
To get 1 truck, give up 1000/200= 5 phones
The OC of a truck is 5 phones, moving from B to C
• Moving C to D: to get 400 trucks, give up 5000
To get 1 truck, give up 5000/400=12.5 phones
The OC of a truck is 12.5 phones, moving from C to D
o Notice that the OC of a truck increases as we move down Westdale’ s PPF
o Increasing OC: explain why the PPF is bowed out. The more trucks we
want, the more expensive they become in terms of the number of
smartphones we have to give.
• The |Slope| of a PPF: is always the OC of the good on the horizontal axis (x-axis)
• To calculate the OC of a smartphone, you inverse the OC of a truck moving backward over
the same range. For an example:
o Moving from B to A: to get 2000 phones, give up 500 trucks
To get 1 phone, give up 500/2000= 0.25 trucks
• Can OC be constant?
o Yes. It’s possible that resources can be perfectly suitable and be equally
productive so that you always give up the same amount of one good to get
more of the other.
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ECON 1B03: Chapter 2
Book notes: 29/Sep/2017
| 3
o If OC costs are constant and are the slope of a PPF, then PPF with constant
OC must be linear
Shifts is PPF:
• It is possible that things change in an economy over time. Anything that changes
available resources or the current technology will shift the PPF.
• Economic growth: a rightward shift of the curve signal
o Could be caused by:
▪ Immigration that increase labor forces.
▪ The development of a new technology
▪ Increase in land converted for industrial development
• Economic contraction: a leftward shift signals
o Could be caused by:
▪ An event that reduces the amount of productive resources available
(i.e. natural disaster or mass emigration of labor forces)
Comparative Advantage and Gains from Trade:
❖ Example: Tony and Denny are trapped on an island. Two goods are produced- clothes
and food-. The following table reports how much of each good they can produce if
they produce only one or the other:
• For tony:
o To get 14 food, give up 28 clothes
o To get 1 food, give up 28/14= 2 clothes
o The OC of a food= 2 clothes
o The OC of clothes=1/2 food
• For Denny:
o To get 120 food, give up 30 clothes
o To get 1 food, give up 30/120 = ¼ clothes
o The OC of a food= ¼ clothes
o The OC of a clothes=4 food
Table of their OC:
OC of clothes
OC of food
Tony
½ food
2 clothes
Denny
4 foods
¼ clothes
Clothes
Or
Food
Hours to produce
Tony
28
14
8
Denny
30
120
8
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ECON 1B03 Full Course Notes
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Document Summary
Chapter 2: production possibilities and gains from trade. Example: westdale: can produce two goods, smartphones and trucks. The following table explains four combinations of phones and trucks that can be produced if it uses all its resources efficiently given its current technology. If it only gives its resources to producing phones, then it cannot produce any trucks. If it wants only 5000 phones, then the left products can produce 700 trucks, etc. therefore, moving resources from one product to another allows that product to be made more. | 2: moving a to b: to get 500 trucks, give up 2000 phones. To get 1 truck, give up 2000/500= 4 phones. The oc pf a truck is 4 phones, moving from a to b: moving b to c: to get 200 trucks, give up 1000 phones. To get 1 truck, give up 1000/200= 5 phones.
