1.2 The production possibility frontier
Activities
Principles of Microeconomics: "Chapter 2, Sections 1 and 2"
- Read Sections 2.1 and 2.2 . Take a moment to read through the stated learning outcomes for this chapter, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Also, attempt the "Try It" problems for each section before checking your answers. The first section of the chapter will introduce you to the four factors of production that are present in the economy: labor, capital, natural resources, and entrepreneurship. Using any two factors of production, you can then learn to construct the production possibility frontier (PPF) in a two plane model. Note the economic implications of the downward slope and the bowed-out shape of the PPF curve. Also, note the meaning of producing on the curve versus inside the curve. Lastly, think about what it means to move along the curve.
Khan Academy: "Production Possibilities Frontier"
- Watch this video about the production possibilities frontier.
Khan Academy: "Allocative Efficiency and Marginal Benefit"
- Watch this video about allocative efficiency and marginal benefit.
Khan Academy: "Economic Growth through Investment"
- Watch this video about economic growth through investment.
Comparative advantage vs. absolute advantage
This model is an application of the production possibility frontier studied in the previous section, albeit in a global set-up. In this subunit, we will bring the argument for international trade, specialization, comparative advantage, and the resulting economic growth to light. The mechanics of comparative advantage will reveal why it would benefit a country to import goods it produces at home.
Analyzing advantage
Absolute and comparative advantage is a difficult topic. This quiz challenges you to use analytical reasoning to explore what absolute advantage and comparative advantage actually mean, what opportunity costs are, and the real choices that national economies have to make.
