CHAPTER CHECKLIST
                                                                                                     1.  Use the production possibilities frontier to 
                                   The Economic                        Chapter                           illustrate the economic problem.
                                                                                                     2.  Calculate opportunity cost.
                                               Problem                    3                          3.  Define efficiency and describe an efficient use of 
                                                                                                         resources.
                                                                                                     4.  Explain how specialization and trade expand 
                                                                                                         production possibilities.
                                              Copyright © 2002 Addison Wesley
                               LECTURE TOPICS
                               LECTURE TOPICS                                                                 3.1 PRODUCTION POSSIBILITIES
                                                                                                     Production Possibilities Frontier
                      Production Possibilities                                                          Production possibilities frontier
                      Opportunity Cost                                                                  The boundary between the combinations of goods and 
                      Using Resources Efficiently                                                       services that can be produced and the combinations 
                      Specialization and Exchange                                                       that cannot be produced, given the available factors of 
                                                                                                         production and the state of technology.
                                                                                                         The PPFis a valuable tool for illustrating the effects of 
                                                                                                         scarcity and its consequences.
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                          3.1 PRODUCTION POSSIBILITIES
                                                                                           3.1 PRODUCTION POSSIBILITIES
                Figure 3.1 shows the                                                   The PPF puts three features of production possibilities 
                PPFfor bottled water                                                   in sharp focus: 
                and CDs. 
                                                                                          • Attainable and unattainable combinations
                Each point on the                                                         • Full employment and unemployment
                graph represents a                                                        • Tradeoffs and free lunches
                column of the table.
                The line through 
                the points is the 
                PPF. 
                          3.1 PRODUCTION POSSIBILITIES                                     3.1 PRODUCTION POSSIBILITIES
                                                                                  Figure 3.2 shows attainable and 
                     Attainable and Unattainable Combinations                     unattainable combinations.
                        • Because the PPF shows the limits to production, it      We can produce at any point 
                          separates attainable combinations from                  inside the PPF or on the 
                          unattainable ones.                                      frontier.
                                                                                  Points outside the PPF such 
                                                                                  as point G are unattainable.
                                                                                  The PPFseparates attainable 
                                                                                  combinations from 
                                                                                  unattainable ones.
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                             3.1 PRODUCTION POSSIBILITIES                                               3.1 PRODUCTION POSSIBILITIES
                        Full Employment and Unemployment                                      Figure 3.3 shows full 
                        Full employment occurs when all the available factors of              employment and 
                        production are being used.                                            unemployment.
                        Unemployment occurs when some factors of                              1.  When resources are 
                        production are not used.                                                fully employed, production 
                                                                                                occurs at points on the 
                                                                                                PPFsuch as Dand E.
                                                                                              2.  When resources are 
                                                                                                unemployed, production 
                                                                                                occurs at a point inside 
                                                                                                the PPF such as point H.
                             3.1 PRODUCTION POSSIBILITIES                                               3.1 PRODUCTION POSSIBILITIES
                                                                                              Figure 3.4 shows tradeoffs 
                                                                                              and free lunches.
                        Tradeoffs and Free Lunches                                            1. When production is on the 
                        Tradeoff                                                               PPF, we face a tradeoff. To 
                        A constraint or limit to what is possible that forces an               get more of one good we must 
                        exchange or a substitution of one thing for something                  forgo some of the other good 
                        else.                                                                  as we move along the PPF.
                                                                                              2. When production is inside the 
                                                                                               PPF, there is a free lunch. We 
                                                                                               can move to the PPF and get 
                                                                                               more goods without forgoing 
                                                                                               either good.
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                                                                                                                3.2 OPPORTUNITY COST
                                3.2 OPPORTUNITY COST                                                             Figure 3.5 shows how to calculate the opportunity 
                                                                                                                 cost of a bottle of water.
                      The Opportunity Cost of a Bottle of Water
                          The opportunity cost of a bottle of water is the decrease 
                          in the quantity of CDs divided by the increase in the 
                          number of bottles of water as we move down along the 
                          PPFin Figure 3.5.
                                3.2 OPPORTUNITY COST                                                            3.2 OPPORTUNITY COST
                                 Moving from A to B, the first 1 million bottles of                              Moving from B to C, the next 1 million bottles of 
                                 water costs 1 CD.                                                               water cost 2 CDs.
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