What does the production possibility frontier (PPF) show?
the maximum amount of a good that can be produced once the decision has been made to produce any amount of another good
When there is only one factor of production (ie. labor) what does the production possibility frontier of an economy look like?
it is a straight line
if an economy decides to devote ALL of it's resources to one good and none to another...
these Max numbers able to produced are shown by the points actually on either the Y or X - axis
What is the opportunity cost when the production possibility frontier PPF is a straight line?
the Opportunity Cost of one unit of a good in terms of another good is CONSTANT
in this chapter and (cheese & wine example) how would we find: The opportunity cost of CHEESE in terms of WINE?
to find this we would do: (unit labor requirement of CHEESE) / (unit Labor requirement of WINE)
To determine what an economy will actually produce, what do we need to look at?
we need to know the RELATIVE PRICE of the economy's two goods ( the price of one good in terms of the other)
In this exmple economy when we only have ONE factor of production ( labor) how do we determine the SUPPLY of the two goods (wine & cheese) ?
the supply of the two goods ( wine & cheese) are determined by the movement of labor to whichever sector PAYS THE HIGHER WAGE
in our one-factor model ( we only have labor)...
there are NO PROFITS ( so workers receive the full value of their output)
If (Pc) = price of CHEESE, (Pw) = price of Wine, (aLC) = unit labor requirement for 1 pound of cheese, (aLW) = unit labor requirement for 1 gallon of wine --- When will the economy SPECIALIZE in the production of Cheese?
it will specialize in cheese if (Pc / Pw) > (aLC / aLW)