Arnold 8e Ch 02 Final

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    PaulSchneiderman,Ph.D.,ProfessorofFinance&Economics,SouthernNewHampshireUniversity

    2008SouthWestern

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    In

    This

    Lecture.. AnEconomysProduction

    PossibilitiesFrontier

    IncreasingandConstant

    OpportunityCosts TheProduction

    Possibilities

    Frontier

    and

    VariousEconomicConcepts

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    In

    This

    Lecture..

    ExchangeorTradeTransactionCostsComparative

    Advantageand

    Specialization

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    ProductionPossibilitiesFrontier

    Represents

    the

    possible

    combinationsoftwogoodsthatcanbeproducedinacertainperiodoftimeunderthe

    conditionsofagivenstateoftechnologyandfullyemployed

    resources.

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    ProductionPossibilitiesFrontier

    ConstantOpportunityCosts

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    ProductionPossibilitiesFrontier

    IncreasingOpportunityCosts

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    LawofIncreasingOpportunityCosts

    Asmoreofagood

    is

    produced,

    theopportunitycostsofproducingthat

    goodincrease

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    Increasing

    OpportunityCosts

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    ProductiveEfficiencyand

    Inefficiency

    ProductiveEfficiencyTheconditionwherethemaximumoutputis

    Producedwithgivenresourcesandtechnology

    ProductiveInefficiencyTheconditionwherelessthanthemaximum

    outputisproducedwithgivenresourcesand

    technology.Productiveinefficiencyimpliesthat

    moreofonegoodcanbeproducedwithoutany

    lessofanothergoodbeingproduced.

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    AttainableandUnattainableRegions

    andProductiveEfficiency

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    EconomicGrowthwithin

    aPPFFramework

    Anincreaseinresources oranadvanceintechnology canincreasetheproduction

    capabilitiesofaneconomy,leadingtoeconomicgrowth andshiftoutwardinthe

    productionpossibilitiesfrontier.

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    AdvanceinTechnology

    Anadvanceintechnologycommonly

    referstotheabilitytoproducemoreoutputwithafixedamountofresourcesortheabilitytoproducethesameoutputwithfewerresources.

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    PPFandEconomicGrowth

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    SelfTestQuestions

    1. Whatdoesastraightlineproductionpossibilitiesfrontier(PPF)represent?WhatdoesabowedoutwardPPFrepresent?

    2. WhatdoesthelawofincreasingcostshavetodowithabowedoutwardPPF?

    3. Apoliticiansays,Ifyouelectme,wecangetmoreofeverythingwewant. Underwhat

    condition(s)

    is

    the

    politician

    telling

    the

    truth?

    4. Inaneconomy,onlyonecombinationofgoodsisproductiveefficient.Trueorfalse?Explainyouranswer.

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    ExchangeorTrade

    Exchange(Trade)

    Theprocessofgivinguponethingforsomethingelse.

    TermsofTrade

    Howmuchofonethingisgivenupforhowmuchof

    somethingelse.

    Transaction

    CostsThecostsassociatedwiththetimeandeffortneededto

    searchout,negotiate,andconsummateandexchange.

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    ExchangeorTrade

    ThirdPartyEffects(personsnotinvolvedinthetrade)

    Costs

    Negative

    effects

    of

    the

    tradeBenefits Positiveeffectsofthetrade

    ComparativeAdvantage

    Thesituationwheresomeonecanproduceagoodat

    loweropportunitycost thansomeoneelsecan.

    Specialization

    Producinggoodsinwhichyouhaveacomparativeadvantage

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    ATimelineforTrade

    ExAnte

    Phrasethatmeansbefore, asinbeforeatrade.

    ExPost

    Phrasethatmeans

    after, as

    in

    after

    a

    trade.

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    ExAnte

    ElizabethandBrianBeforetheTrade

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    ExPost

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