Subject:
Economics
Material Type:
Module
Level:
Community College / Lower Division, College / Upper Division
Provider:
Ohio Open Ed Collaborative
Tags:
Comparative Advantage, Efficiency, Opportunity Cost, Oss0042, Scarcity, Trade
License:
Creative Commons Attribution Non-Commercial
Language:
English
Media Formats:
Text/HTML

Education Standards (6)

Model Building, Production Possibilities and Gains from Trade Resources

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 Microeconomics 2ePrinciples of Microeconomics 2e Book Cover

License: Principles of Microeconomics 2e by OpenStax is licensed under Creative Commons Attribution License v4.0. © 1999-2018, Rice University. Except where otherwise noted, textbooks on this site are licensed under a Creative Commons Attribution 4.0 International License.

 

Principles of EconomicsPrinciples of Economics Book Cover

Principles of Economics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. (Author requested non-attribution.)

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.

Active Learning Exercises

 

Game: #48 
Course:Micro
Level:Principles and up
Subject(s):Comparative advantage and trade.
Objective:To illustrate the role of comparative advantage in generating gains from trade.
Reference and contact:Stodder, Jim. "A Simple Experiment of Comparative Advantage." Classroom Expernomics, 3(1), Spring 1994, pp. 8-10.
Abstract:Students are paired up with one representing the United States and the other Mexico. Each student is provided a graph containing the production possibilities frontier (PPF) between two goods, trucks and computers, for their respective country. The PPFs are drawn such that the US has an absolute advantage in both goods and a comparative advantage in computers and Mexico has a comparative advantage in trucks. Students are then asked to choose any point along his or her PPF that he or she "likes" the best (which represents the point of production/consumption in autarky). Next, each pair is asked to find a trade involving trucks and computers that makes each country better than their initial "best points," where better off means that a country gets no less of each good and more of at least one good compared to autarky.
Class size:Any size.
Time:One class period.
Variations:None indicated.
See also:International trade games

 

Questions and Problems

Model Building, Production Possibilities and Gains from Trade

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

C:\Users\Joe\Pictures\Screenshots\Screenshot (443).png

  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:

C:\Users\Joe\Pictures\Screenshots\Screenshot (445).png

  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?

 

Answers:

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