Subject:
Economics
Material Type:
Module
Level:
Community College / Lower Division, College / Upper Division
Provider:
Ohio Open Ed Collaborative
Tags:
Language:
English
Media Formats:
Text/HTML

# Model Building, Production Possibilities and Gains from Trade Resources

## Overview

This topic introduces key concepts that form the foundation of much of microeconomic analysis. The material ranges from a discussion of model-building as a way to simplify complex relationships among economic variables to definitions and descriptions of key concepts such as scarcity, efficiency and inefficiency, opportunity cost, comparative advantage and the gains from trade.

# Learning Objectives

1. Define the factors of production (2,3)
2. Utilize the production possibilities frontier to model scarcity (3,4)
3. Utilize the production possibilities frontier to model increasing opportunity costs (3,4)
4. Utilize the production possibilities frontier to determine opportunity cost (3,4)
5. Determine comparative advantage and resulting specialization (2,3,4)
6. Determine the benefits of free trade, along with winners and losers (2,3,5)
7. Identify different economic systems and their characteristics (2,3,4,5,6)
8. Illustrate economic growth using the production possibilities frontier (2,3,4,7)

NOTE: This Module meets Ohio TAG's 2, 3, 4, 5, 6 and 7 for an Intro to Microeconomics Course OSS004

# Recommended Textbook Resources

## Principles of Economics

Chapter 2.3 Applications of the Production Possibilities Model
This section of the chapter gives another take on uses of the PPF, especially in portraying economic growth.

[Free trade is not discussed until chapters 19 & 20;]

# Supplemental Content/Alternative Resources

## Economics Online

The above link provides a more complete explanation of how economic growth can be interpreted as a shift in the Production Possibilities Frontier.

# Questions and Problems

Instructors can add a Google Doc of the Model Building, Production Possibilities and Gains from TradeQuestions and Problems to their Google Drive or download a Word File of the Model Building, Production Possibilities and Gains from Trade Questions and Problems.

## Questions

### Use Figure 1 to answer questions 1-4

1. Suppose sodas cost $1.00 each and sandwiches cost$5.00 each. What is the consumer’s budget if s/he is consuming at point A?
2. If the price of sodas rises to $2.00 each, what is the maximum number of sodas Pat can buy? 3. If the price of sodas rises to$2.00 each, what is the maximum number of sandwiches Pat can buy?
4. If Pat’s budget rises, how will that affect the budget line?
1. The horizontal intercept (maximum sandwiches) moves in.
2. The vertical intercept (maximum sodas) moves out and the horizontal intercept (maximum sandwiches) moves in.
3. The budget line shifts in.
4. The budget line shifts out.

### Use Figure 2 to answer the next set of questions:

1. Identify all of the points that represent an efficient use of the society’s resources.
2. Which point represents an inefficient use of the society’s resources?
3. Which point represents a combination of output that this economy cannot currently produce?
4. Which point would enable the society to reach the currently unattainable combination the fastest?

### Use Figure 2 to answer the next set of questions:

1. What is the opportunity cost of moving from point A to point B?
2. What is the opportunity cost of moving from point B to point A?
3. What type of opportunity costs does this graph reflect?

### Question Set 1

1. $17.00: 5 ×$1.00 + 3 × $5.00 =$20.00
2. $20/$2 = 10
3. There is no change in the maximum number of sandwiches if the budget and the price of sandwiches do not change.
4.
1. The horizontal intercept (maximum sandwiches) moves in.
2. The vertical intercept (maximum sodas) moves out and the horizontal intercept (maximum sandwiches) moves in.
3. The budget line shifts in.
4. The budget line shifts out.

### Question Set 2

1. Points A and D
2. Point B
3. Point C
4. Point D

### Quesiton Set 3

1. Six units of consumption goods.
2. One unit of investment goods.
3. Increasing