AP Microeconomics Chapter 3

-Every day a vast array of goods and services are produced
-Production capability is limited by available resources and technology
-We must make rational choices on scarcity of resources and technology:
-Fixed quantities of factors of production at any given time
-Fixed quantities of the state of technology at any given time

the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology
-Shifts when resource or technology changes
-Illustrates effects of scarcity and its consequences

-Attainable and Unattainable Combinations
-Efficient and Inefficient Production
-Tradeoffs and Free Lunches

-Separates attainable and unattainable limits
-Can produce smaller or equal quantities of PPF, but never larger
-Attainable: on line or inside PPF (to left)
-Unattainable: outside PPF (to right)

-Production efficiency: a situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else
-To be efficient, all factors of production must be employed; each resource assigned to the task it perfects
-In PPF (to left) is inefficient
-On PPF line is efficient

-Tradeoff: an exchange - giving up one thing to get something else; a choice; PPF is an idea of a tradeoff; to produce more of one, you must produce less of another
-Free Lunch: a gift- getting something without giving up something else; only exists if production is inefficient
-On PPF line: face trade off
-Inside PPF: free lunch

number forgone of other product divided by the number gained

-Magnitude of the slope of the PPF measures the opportunity cost
-The opportunity cost increases as the quantity of products produced increases

-Opportunity cost of Product A = the ratio of Product B forgone to Product A gained
-Opportunity cost of Produce B= the ratio of Product A forgone to Product B gained
-Opportunity cost of a Product A is equal to the inverse of the opportunity cost of Product B

-Steep slope = increasing
-to make more of something, you must give up something else
-Every production activity has increasing opportunity cost
-constant opportunity: same slope on every point

-Definition: the sustained expansion of production possibilities
-The economy grows with improved technology, labor and capital
-Consumption must decrease; short term loss for long term gain
-To study economic growth, we change the two goods and look at the production possibilities for consumption good and a capital good
-The greater the production of new capital, the faster the expansion of production possibilities
-Economic growth shifts the PPF onward
-To keep producing capital, current consumption must be less than its maxim possible level

when one person (or nation) is more productive than another - needs fewer inputs or takes less time to produce a good or perform a production task
-How long it takes to produce a good

the ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else
-How much of a good must be forgone to produce a unit of another good

-Liz can make 15 smoothies or 15 salads in one hour; opportunity cost for producing 1 smoothie is 1 salad; opportunity cost for producing 1 salad is 1 smoothie
- Joe can make 6 smoothies or 30 salads in one hour; opportunity cost for producing 1 smoothie is 5 salads; opportunity cost for producing 1 salad is 1/5 of a smoothie
-Liz has a comparative advantage in producing smoothies
-Joe has a comparative advantage in producing salads

-Liz & Joe work together: specialize in production
-Gains from trade results in total production increase by 10 smoothies and 10 salads