CHAPTER2Trade-offs, ComparativeAdvantage, and the Market SystemChapterOutlineandLearningObjectives2.1ProductionPossibilitiesFrontiers and OpportunityTESLCosts2.2ComparativeAdvantageandTrade2.3TheMarketSystem
1 Chapter Outline and Learning Objectives 2.1 Production Possibilities Frontiers and Opportunity Costs 2.2 Comparative Advantage and Trade 2.3 The Market System CHAPTER 2 CHAPTER Trade-offs, Comparative Advantage, and the Market System
ScarcityandTrade-offsHouseholds,firms and governments continuallyface decisionsabouthowbesttousetheirscarceresources.Scarcity: a situation in which unlimited wants exceed the limitedresourcesavailabletofulfillthosewants.Scarcity requires trade-offs. Economics teaches us tools to help makegood trade-offs.Example:When deciding how to use its scarce workers andmachinery,if Teslawantstoproduce more ModelXSuVs,thoseresourceswillnotbe availabletoproduceModelSsedans.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 Scarcity and Trade-offs Households, firms and governments continually face decisions about how best to use their scarce resources. Scarcity: a situation in which unlimited wants exceed the limited resources available to fulfill those wants. Scarcity requires trade-offs. Economics teaches us tools to help make good trade-offs. Example: When deciding how to use its scarce workers and machinery, if Tesla wants to produce more Model X SUVs, those resources will not be available to produce Model S sedans
ProductionPossibilitiesFrontiersandOpportunityCosts2.1LEARNINGOBJECTIVEUseaproductionpossibilitiesfrontierto analyze opportunitycostsandtradeoffs.@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 Production Possibilities Frontiers and Opportunity Costs 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs
ProductionPossibilitiesFrontierAproductionpossibilities frontier(PPF)is a curve showingthemaximum attainable combinations of two products that may bepurchases with available resources and current technologyQuestion:IsthePPFapositiveornormativetool?Answer: Positive: it shows "what is", not "what should be"@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 Production Possibilities Frontier 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. Question: Is the PPF a positive or normative tool? Answer: Positive; it shows “what is”, not “what should be
A ProductionPossibilities Frontier for TeslaTesla'sProductionChoicesat ItsFremontPlantTesla can produce sedansChoiceQuantityofSedans ProducedQuantityofSUVsProduced80A0and/or SUVs.B6020C4040D2060If it wants to produce moreE080sedans,itmustreduce theQuantityofsedansnumber of SUvS.producedper dayAcombinationthatisunattainablewitt80current resources· Points on the PPF areTesla's productionpossibilities frontierattainable for TeslaGshowingitstrade-oft60between.producingsedansandSUVsPoints belowthecurveare40inefficient3020Pointsabovethecurveareunattainablewithcurrent80010204060QuantityofSUVsproduced per dayresources.Acombinationthat isinefficientbecausenotallresourcesarebeingusedFigure 2.1Tesla's productionpossibilitiesfrontier@2015PearsonEducation,Inc.5
© 2015 Pearson Education, Inc. 5 A Production Possibilities Frontier for Tesla Tesla can produce sedans and/or SUVs. If it wants to produce more sedans, it must reduce the number of 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 Figure 2.1