Class Summary 10/21/11

Trade (continued)


Trade creates wealth, and is a non-technical form of production.

Production Possibilities Frontier

Properties of PPFs:

1. All points in/on the PPF are achievable
2. If someone can produce guns or butter better than another person, then we say that the former person has an absolute advantage in producing either product over the latter person.
3. All points to the Northeast are not achievable.
4. Points on the PPF are productively efficient.
5. The slope captures the concept of scarcity--the only way to get more butter is to sacrifice guns.
6. The change in slope illustrates the Law of Diminishing Returns (aka increasing opportunity costs). This deals with drawing away lower quality inputs. The trade-offs become worse over time.
7. Economic growth occurs when you get more resources, better technology, to trade.

• Affects the curve: less guns more butter, less butter more guns, or overall production increases for both products.