Microeconomics
The production possibility frontier (PPF) is a curve depicting all maximum output
possibilities for two goods, given a set of inputs consisting of resources and other factors;
assuming that all inputs are used efficiently.
- D is inefficient
- B and C are attainable - A is unattainable
- An economy-wide PPC in a two agent economy
A representation of an economy wide PPC - The bow shape is due to the
Principle of Increasing OC (Low hanging fruit) that the Person with lower OC would produce/ do the job until their resources are exhausted, - Slope of curve is increasing, meaning
the OC increases
- Economy-wide PPC gets shifted out if there is:
o An increase in infrastructures such as factories, equipment o An increase in population, and so in labour force
o Advancements in knowledge technology
- An agent or economy has an absolute advantage if he/she is able to carry out this activity with less resources (eg. time) than another agent
- Opportunity cost of a given action is defined as the value of the next best alternative to that action
- The cost-benefit principle is when an individual/firm should only take action if the extra benefits from taking action are at least as great as the costs
- An agent or economy has a comparative advantage if he/she has a lower opportunity cost of carrying out that activity than another agent
- The Principle of Comparative Advantage states that everyone is better off if each agent (or each country) specializes in the activities for which they have a
comparative advantage.
- A PPC is a curve that represents all of the maximum output possibilities for two or more goods, given a set of inputs (or resources - i.e., time), and given that those inputs are used efficiently.
- The Low-Hanging Fruit Principle (or Increasing Opportunity Cost) states that in the process of increasing the production of any good, one first employs those resources with the lowest opportunity cost and only once these are exhausted turn to
resources with higher cost.
- The CPC (Consumption Possibility Curve) represents all possible combinations of bananas and rabbits that the economy can feasibly consume when it is open to international trade
- Market equilibrium = Quantity demanded = Price supplied
- Just as the economy-wide shows all possible combinations of two goods that a country can produce, the CPC shows all combinations of the two goods that the agents in the economy can consume
Trading:
- Closed economy (no trade)
o PPC and CPC are identical – Agents must consume whatever they produce - Open economy (trade on the international market)
o CPC is to the right and above the PPC – this is due to the produce being able to be traded for other goods and services – relieving restrictions on
consumptions
- To draw the CPC, you need to derive its slope – which is determined by the relative prices of resources on the international market (eg. If you can trade a resource for another then the slope is 1)
Note
- Bow shape shows the different OCs of different people – increasing slope, increasing OC (Hanging fruit principle)
- Consumption opportunities in an open economy are always wider than a closed one
Critiques to the model - We assumed that:
o No transaction costs connected with trading (negotiation, transport cost) o No import quota (only a certain amount of unit are able to be imported) or
tariff (per unit tax on units that come into the country) – limit gains from specialisation
Absolute advantage refers to a country’s ability to produce a certain good more efficiently than another. Comparative advantage refers to a country’s ability to produce a particular good with a lower opportunity cost than another
Chapter 2: Supply in Perfectly Competitive Markets
- Characteristics of a perfectly competitive marketo Consumers and suppliers are price-takers o Homogeneous goods
o No externality
o Goods are excludable and rival o Full information
o Free entry and exit
- Supply curve (think at the margin)
