Chapter Two: Key Terms
Principles of Macroeconomics 2e
How Individuals Make Choices Based on Their Budget Constraint
The Production Possibilities Frontier and Social Choices
Chapter Two: Key Concepts and Summary
Chapter Two: Self Check Questions
Chapter Two: Review Questions
Chapter Two: Critical Thinking Questions
Chapter Two: Problems
How Economists Use Theories and Models to Understand Economic Issues
How To Organize Economies: An Overview of Economic Systems
Trade offs and Comparative Advantage: Course Map & Recommended Resources
This topic is considered optional as it would primarily be part of a principles of microeconomics course. If microeconomics is a prerequisite for macroeconomics, this topic can either be skipped entirely, or could be reviewed briefly. In some macroeconomics principles courses, this may need to be presented as new information. Learning objectives of particular interest for a macro course are 1, 2, 7, and 8. Please note that some of the learning objectives contained in this section may overlap with the International Trade unit.
- Define the factors of production (2)
Utilize the production possibilities frontier to model scarcity (2,16)
Utilize the production possibilities frontier to model increasing opportunity costs (2,16)
Utilize the production possibilities frontier to determine opportunity cost (1,16)
Determine comparative advantage and resulting specialization (1,14)
Determine the benefits of free trade, along with winners and losers (14,15)
Identify different economic systems and their characteristics (1,2)
Illustrate economic growth using the production possibilities frontier (1,2,13)
NOTE: This Module meets Ohio TAG's 1, 2, 13, 14, 15, 16 for an Intro to Macroeconomics Course
Recommended Textbook Resources
Important Notes for the instructor regarding this chapter:
The text provides a straightforward approach to the PPF. What is contained in the chapter might be more than what would be presented in an introductory macro course. Section 2.2 contains the critical portion of this concept.
Principles of Macroeconomics 2e: OpenStax CNX. Jun 4, 2018, Chapter 2, pages 27-44
Factors of production are discussed in 1.3: How Economists Use Theories and Models to Understand Economic Issues
Benefits of trade are more thoroughly covered in 20.1-20.2, but this topic is included in the unit on International Trade.
Economic systems are covered in 1.4: How To Organize Economies: An Overview of Economic Systems
Licenses and Attribution:
Principles of Microeconomics Chapter 2.2. Authored by: OpenStax College. Provided by: Rice University. Located at: http://email@example.com:24/Microeconomics. License: CC BY: Attribution
Supplemental Content/Alternative Resources
Important notes for the instructor regarding this source: This is a unit on production possibilities from Lumen Learning. It includes some problems and questions, along with short videos.
Licenses and Attribution:
- CC licensed content, Original. Revision and adaptation. Provided by: Lumen Learning. License: CC BY: Attribution
Hard Studies. Authored by: Thomas Anderson. Located at: https://www.flickr.com/photos/senoranderson/3890652995/. License: CC BY: Attribution
- All rights reserved content
The Production Possibilities Frontier, Part 3 u2013 The Economic Lowdown Video Series. Authored by: Federal Reserve Bank of St. Louis. Located at: https://www.youtube.com/watch?v=Nw0ugthoc8o. License: Other. License Terms: Standard YouTube License
The Production Possibilities Frontier, Part 1 u2013 The Economic Lowdown Video Series. Authored by: Federal Reserve Bank of St. Louis. Located at: https://www.youtube.com/watch?time_continue=6&v=nsQi2ipSP2c. License: Other. License Terms: Standard YouTube License
Important notes for the instructor regarding this source. This provides a unit on comparative advantage, and includes some simple exercises.
Licenses and Attribution:
- This work is licensed under a Creative Commons Attribution 4.0 International License. You can also download for free at http://firstname.lastname@example.org
For questions regarding this license, please contact email@example.com.
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For the Heritage Foundation’s Index of Economic Freedom: https://www.heritage.org/index/
There is not a data exercise for this topic separate from the Active Learning Exercise below. Students will create their own data set, along with a graph, in order to analyze marginal opportunity costs.
An extension of the Active Learning Exercise is as follows:
- Have students partner with each other to perform the same sets of tasks. They will complete the exercise individually, and then compare opportunity costs. With this information, have students create a single production possibilities frontier, combining their individual PPFs to create a bowed out curve.
Active Learning Exercise
Construct a production possibilities curve. Think of two activities that you might choose to do.
Consider products that would be produced as a result of these activities. Construct a graph based on these two activities, and label your axes with units of production per hour. Do NOT put production in terms of minutes spent on the activity. How many units of good A could you produce in one hour? How many units of good B could you produce in one hour?
For example, if one of your activities is studying for economics, instead of minutes spent studying, think of your production as pages read, or problems solved. If your other productive activity is working out, put your production in terms of number of repetitions or miles completed or calories burned.
Once the graph is completed, calculate the opportunity cost of each activity in terms of the others. It is acceptable to assume constant marginal opportunity cost for the sake of this exercise. Is this a reasonable assumption for your activities? Why or why not?