Understanding Production Possibilities -Final 4-6-11

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1、UnderstandingtheProductionHowtheGovernmentEstimatesUnemploymentPossibilitiesFrontier(PPF)CharlesN.Anderson©Copyright2011byCharlesN.Anderson.1AllRightsReserved.TheProductionPossibilitiesFrontierI.DefinitionAnexpositorymodelforexplainingthelawofrelativescarcity.Initsmostbasicconfiguration,themodelis

2、usefulforadisciplinedapproachtounderstandingtheproblemsof:EconomicgrowthTheallocationofscarceresourcesTheproductionanddistributionofgoodsandservices.Thefrontieritselfisalocusofpointswhichconstitutesalltheefficienttradeoffsbetweenxandy,giventheassumptionsonthefollowingpages.2©Copyright2011byChar

3、lesN.Anderson.AllRightsReserved.TheProductionPossibilitiesFrontierII.ListofAssumptions(LevelofAbstraction)Abstraction)A.Countryhasclosedeconomy(noforeigntrade)B.CountryproducestwogoodsC.CountryhasagivenquantityandqualityofeconomicresourcesD.CountryhasagivenstateoftechnologyE.Fullemploymentofeconom

4、icresources(noidlecapital;noidlelabor)F.CountryusesbestavailabletechnologyG.TimeperiodisshortNote:thereisnoinformationgivenaboutthetastesandpreferencesoftheresidentsofthiscountry.Thereforetheshapeandformofthiscurvepurelyrepresentsthesupplysideofthiseconomy.3©Copyright2011byCharlesN.Anderson.AllRig

5、htsReserved.TheProductionPossibilitiesFrontierIII.ThingstoKnowA.PointsonthecurveB.PointsinsidethecurveC.PointsoutsidethecurveD.ShiftsandpivotsinthecurveE.Theshapeofthecurve4©Copyright2011byCharlesN.Anderson.AllRightsReserved.TheProductionPossibilitiesFrontierIV.ImportantConceptsA.IntermsofthePPFcu

6、rvetheeconomyisproductivelyefficientwhenitisnotpossibletoproducemoreofonegoodwithoutgivingupsomeoftheother.B.Theopportunitycostofanactionundertakenisthevalueofthenextbestthinggivenup(forsaken).C.ThephenomenonofEconomicgrowthisshownbyanoutwardshiftorpivotofthefrontier.5©Copyright2011byCharlesN.Ande

7、rson.AllRightsReserved.V.TheProductionPossibilitiesFrontierIllustratedTable1PointsQyQxMarginalcostTable1ofxA3.70-B3.510.2yC320.5yD231.0yE042.0yCapitalGoodsFigure14AFBC3UD21E01234ConsumptionGoods©Copyright2