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Dr. Mohammed Alwosabi

Dr. Mohammed Alwosabi

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Published by coldpassion
Econ 140 Notes, By Dr.Awosabi
Econ 140 Notes, By Dr.Awosabi

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Published by: coldpassion on Dec 07, 2009
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Dr. Mohammed Alwosabi Econ 140 Ch.2
 Notes on Chapter 2
This chapter reinforces the central themes of Chapter one by laying out the coreeconomic model, the
, and using it to illustrate the concepts of scarcity,tradeoff and opportunity cost. It explains, with a model, the concepts of marginal cost and marginal benefit, introduces efficiency, and explains how wecan expand production by accumulating capital and improving technology.
The economic problem of allocating resources (making choices) in a situationof scarcity can be illustrated by explaining the concept of the productionpossibilities frontier (PPF).
Production Possibilities Frontier (PPF)
refers to the maximum combinationsof goods and services an economy can produce efficiently using its availableresources and technology within a given period of time.
It is the boundary between the goods and services that can be produced fromthose that cannot.
The PPF model is a graphical illustration with the following assumptions1.
The society has a fixed amount of available common resources. i.e., thesame limited resources can be used to produce either of the goods.2.
The society has a fixed amount of technology3.
Full employment of resources4.
The choice is between producing two goods: Machines and Food. Allother goods and services are assumed being the same (ceteris paribus).This assumption is to allow the use of simple graphical analysis.
Note that these assumptions are realistic for the short run but not for the longrun.
Dr. Mohammed Alwosabi Econ 140 Ch.2
The following table summarizes hypothetical choices, or productionpossibilities that we confront. This is a production possibilities schedule.Possibility(Point)MachinesPer dayFood (in tons)per dayA 5 0B 4 2C 3 3D 2 3.8E 1 4.5F 0 5
The numbers are plotted in the following graph that is called productionpossibility frontier (PPF).
The PPF curve divides production space into 3 distinct areas, (1) points on thePPF curve (points like A, B, C, D, E, and F), (2) points on the inside of thecurve (points like X), and (3) points outside the curve (points like Y)
Points either on or inside the frontier are
with the current level of resources and technology.
Dr. Mohammed Alwosabi Econ 140 Ch.2
Points outside the frontier are
with the economy's current level of resources and technology. We need more than the available resources andtechnology to reach there.
Because scarcity forces the society to give up one choice for another, the slopeof the PPF will always be negative, reflecting the concept of trade off.
Possibility A shows that all resources are devoted to producing machines andno resources are available to produce food.
Possibility B shows that if some of the resources are assigned to produce 2 tonsof food, the production of machines would be reduced to 4 machines. Why?Because the resources used to produce the 5
machine were transformed tofood production.
The pattern continues on to the possibility F, where all resources are in theproduction of food and no resources available to produce machines. This resultsin 5 tons of food and zero machines
Points on the PPF represent the maximum production (output) we can get whenall resources are fully employed.
Full Employment and Unemployment
From the assumptions stated earlier, all resources must be
fully employed
inorder for the economy to be operating on the PPF.
If all available resources are not used (i.e.,
of some of theresources), country ends up inside its PPF, producing less output than theycould have.
A reduction in unemployment moves the economy’s point of production closerto the PPF. When the society is closer to the PPF that means it is closer to fullemployment

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