Econ 200, Autumn 2016

Lecture 2
10/04/2016
0. Log in to Learning Catalytics (session id:21030569)
1. Administrative Details
2. PPFs and Production
3. Comparative Advantage and Gains from Trade

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Administrative Issues
• Karen from Pearson will be in Savery 305 on Thursday from 1:30-
3:00 to address remaining issues with MEL/LC.

• Homework 1 due date extended due to a small number of people

being locked out of myeconlab. Assignment due Wednesday at
11:59 pm.

• Homework 2 is now available and due Monday night. Don’t forget

that you get two chances for each problem (“Similar Question”).

• I will drop an additional class participation score (5 total) due to the

addition of pop quizzes in quiz section (there will be three total).
• These dropped scores take the place of any makeups you may need for
missed classes.

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Article Response Assignment
• Three article responses will be due over the course of the quarter
on the following dates:
• October 28
• Nov 18
• Dec 2
• All are due at 11:59 pm on these dates
• Submission through Canvas only

• Please start looking for articles related to the topics we are

covering. They should be recent articles, published after
September 1, 2016.

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Article Response Assignment

From the syllabus: “You must describe, in your own words, the
issues presented in the article, and then summarize how the
material taught in class explains the information, events, or
phenomenon in the article. This economic explanation must
relate to a theoretical graph (one with some sort of equilibrium,
like Supply and Demand, the PPF, etc). The graph must be
drawn and included in your response.”

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Article Response Assignment
Start looking for your article now!

Must be published in an actual newspaper (or online version), not an

opinion piece, relevant to the topics covered until October 28, and
published after Sep 1, 2016.

Places to look for news articles online:

-Lexis Nexis
-Proquest
-Newsbank
(All links can be found here:
http://guides.lib.washington.edu/news/enews)

Note: No blog posts, Wikipedia or other “encyclopedia” entries

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Production Possibilities Frontier
Imagine you are in charge of an entire economy.

What should you consider when deciding how much of

each type of good and service to produce (e.g. how
many guns and how much butter?)

(Is this how our economy is designed?)

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Production Possibilities Frontier
Chapter 2, Section1

Households, firms and governments continually face decisions about

how best to use their scarce resources.

Scarcity requires trade-offs. Economics teaches us tools to help make

good trade-offs.

A production possibilities frontier (PPF) is a curve showing the

maximum attainable combinations of two products that may be
purchases with available resources and current technology.

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A Production Possibilities Frontier for Tesla
Tesla can produce sedans
and/or SUVs.

• Points on the PPF are

attainable for Tesla.

• Points below the curve are

inefficient.

• Points above the curve are

unattainable with current
resources.

Tesla’s production possibilities frontier

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Tesla Can Trade Off Sedans for SUVs
To produce 20 more SUVs
(e.g. moving from A to B),
Tesla must produce 20 fewer
sedans.

The 20 fewer sedans is the

opportunity cost of
producing 20 more SUVs.

Opportunity cost: The

highest-valued alternative that
must be given up to engage in
an activity.
Tesla’s production possibilities frontier
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Increasing Marginal Opportunity Costs
On the previous slide,
opportunity costs were
constant.

But opportunity costs are

often increasing.

Why? Some resources are

better suited to one task than
another. The first resources to
“switch” are the one best
suited to switching.
Increasing marginal opportunity costs

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Economic Growth on the PPF
As more economic resources
become available, the
economy can move from point
A to point B.

Shifts in the production

possibilities frontier represent
economic growth.

Economic growth: the ability of the economy to increase the

production of goods and services.

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Technological Change in One Industry
This panel shows
technological improvement in
the automobile industry.

The quantity of tanks that can

be produced remains
unchanged.

Economic growth

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EX: A PPF for Exam Grades
Suppose you have a limited amount of time to study for two exams,
Economics and Accounting.

What would the production possibilities curve for the exam grades
look like?

Would it be a straight line or a curved one? Why?

Curved, since the marginal benefit of studying a topic for an extra

hour decreases in the number of hours spend studying that topic.

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Refer to the graph below. Which of the following
combinations is unattainable with the current resources
available in this economy?

a. Combination G
b. Combination F
c. Combinations A or E
d. All of the above. None of the combinations above
can be attained with current resources.
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Refer to the graph below. Which of the following
combinations is unattainable with the current resources
available in this economy?

a. Combination G

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Refer to the graph below. Which graph best represents
an increase in the economy’s resources?

a. The graph on the left.

b. The graph on the right.
c. Both graphs.
d. Neither graph.

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Refer to the graph below. Which graph best represents
an increase in the economy’s resources?

a. The graph on the left.

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Comparative Advantage
PPFs for Apples and Cherries

You can spend all of your time

picking 20 pounds of apples,
20 pounds of cherries, or
some combination.

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Comparative Advantage

Your neighbor is more

productive: She can pick 30
lbs of apples or 60 lbs of
cherries.

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Specialization and Trade
What if you and your neighbor decided to specialize and trade?

Trade: The act of buying and selling.

Could your neighbor benefit from trade? She is better at picking both
apples and cherries…

Both of you can benefit from trade, by specializing in what you are
relatively good at. Let’s see how…

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Gains from Specialization and Trade

When you don’t trade with your neighbor, you are at point A.

When your neighbor doesn’t trade with you, she is at point C.

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Gains from Specialization and Trade—continued
Figure 2.5

If you specialize in picking apples, you can pick 20 pounds. If your

neighbor specializes in picking cherries, she can pick 60 pounds.

If you trade 10 pounds of your apples for 15 pounds of your

neighbor’s cherries, you will be able to consume 10 pounds of apples
and 15 pounds of cherries— point B in panel (a).

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Gains from Specialization and Trade—continued
Figure 2.5

If you trade 10 pounds of your apples for 15 pounds of your neighbor’s

cherries, you will be able to consume 10 pounds of apples and 15 pounds of
cherries— point B in panel (a).

Your neighbor can now consume 10 pounds of apples and 45 pounds of

cherries—point D in panel (b). You and your neighbor are both better off as a
result of trade.

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Gains from Specialization and Trade

You Your Neighbor

Apples Cherries Apples Cherries

(in pounds) (in pounds) (in pounds) (in pounds)
Production and consumption
without trade 8 12 9 42
Production with trade 20 0 0 60
Consumption with trade 10 15 10 45
Gains from trade (increased
consumption) 2 3 1 3

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Explaining the Gains from Specialization and Trade
How could both of you benefit from trade, when your neighbor was so
much better than you?

Absolute advantage: The ability of an individual, a firm, or a country

to produce more of a good or service than competitors, using the
same amount of resources.

Comparative advantage: The ability of an individual, a firm, or a

country to produce a good or service at a lower opportunity cost than
competitors.

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Comparative Advantage and the Gains from Trade

Opportunity Cost of Picking Opportunity Cost of Picking

1 Pound of Apples 1 Pound of Cherries
You 1 pound of cherries 1 pound of apples

Your Neighbor 2 pounds of cherries 0.5 pound of apples

Opportunity costs of picking apples and cherries

The basis for trade is comparative advantage, not absolute

advantage.

Individuals, firms, and countries are better off if they specialize in

producing goods and services for which they have a comparative
advantage and obtain the other goods and services they need by
trading.

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Refer to the graph below. Does the cost of automobiles (in
terms of foregone aircraft carriers) get larger or smaller as the
number of automobiles increases? (Your answer is valid for
either curve.)

a. Smaller
b. Larger
c. Can’t tell just by looking at it

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Refer to the graph below. Does the cost of automobiles (in
terms of foregone aircraft carriers) get larger or smaller as the
number of automobiles increases? (Your answer is valid for
either curve.)

b. Larger

Why?

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Refer to the graphs below. Each graph represents one
country. Which country should specialize in the production of
chips?

a. Country A
b. Country B
c. Neither country. They both should produce some
chips.
d. Both countries should specialize in the production of
chips.
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Refer to the graphs below. Each graph represents one
country. Which country should specialize in the production of
chips?

a. Country A

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