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Cloth (millions of meters per bottle) 5 4 3 2 1 a Marginal Benefit b c Decreasing marginal benefit from wine 0 1 2 3 4 5 * wine (millions of bottles) Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa d e MB * Efficient use of resources Resource use is efficient when we produce the goods and services that we value most highly. • When resources are used efficiently ‣ if we produce any more of one good, we give up something that we value even more highly ‣ To find optimality decision, we compare the marginal cost to the marginal benefit. Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Efficient Use of Resources • If the marginal benefit of the last unit of a good exceeds its marginal cost, we increase production of that good. ‣ MB > MC; increase • If the marginal cost of the last unit of a good exceeds its marginal benefit, we decrease production of that good. ‣ MB < MC; decrease * Marginal cost and willingness to pay (meters of cloth per bottle) 5 4 3 2 1 Efficient Use of Resources Benefit exceeds cost Bottles of pop that people are willing to forgo Bottles of pop that people must forgo Cost exceeds benefit 0 1.5 2.5 3.5 5 * MB MC wine (millions) Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Specialization and trade expand production possibilities There are gains from trade Comparative advantage is the ability to perform an activity at a lower opportunity cost than anyone else. Comparative Advantage • Differences in comparative advantage give rise to gains in trade. • Suppose that CDs have two components: a disc and a plastic case. • Tom and Trish both own factories. ‣ They can each produce both discs and cases, or they can specialize. ‣ What should they do? * Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa * Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa
Comparative Advantage Tom’s Factory can ‣ produce 4,000 discs/hour or ‣ produce 1,333 cases/hour Opportunity Cost ‣ To produce 1 case, he must decrease CD production by 3 discs — opportunity cost. ‣ To produce 1 disc, he must decrease case production by 0.333 cases — opportunity cost. * Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Cases (thousands per hour) Production Possibilities in Tom’s 5 Factory 4 Tom’s opportunity cost: 1 disc costs 1/3 case,and 1 case costs 3 discs 3 2 1 * ∆ Disks ∆ Cases = opportunity cost of cases Tom’s PPF 1 2 3 4 Discs (thousands per hour) Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Trish’s Factory can Comparative Advantage ‣ produce 1,333 discs/hour or ‣ produce 4,000 cases/hour Opportunity Cost ‣ To produce 1 case, she must decrease CD production by 0.333 discs — opportunity cost. ‣ To produce 1 disc, she must decrease case production by 3 cases — opportunity cost. * Cases (thousands per hour) 5 4 3 2 1 b' Tom’s PPF * The Gains from Trade Tom’s opportunity costs: 1 disc costs 1/3 cases, and 1 case costs 3 discs Trish’s PPF a c Trish’s opportunity costs: 1 disc costs 3 cases, and 1 case costs 1/3 disc Trade line 1 2 3 4 Discs (thousands per hour) b Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa Absolute Advantage An absolute advantage exists when a person or nation can produce more of a good than another with the same resources. Individuals and nations can have absolute advantages in any or all goods. However, it is not possible to have a comparative advantage in everything. * Université d’Ottawa / University of Ottawa Université d’Ottawa / University of Ottawa
Page 1 and 2: Today’s Agenda Confronting Scarci
Page 3: Four things to remember about PPF

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