Chapter 2 - Specialization and exchange. In this chapter you will learn: How to construct a production possibilities frontier, describe what causes shifts in production possibilities curves, define absolute and comparative advantage, define specialization and explain why people specialize, explain how the gains from trade follow from comparative | Chapter 2 Specialization and Exchange © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • How to construct a production possibilities frontier. • Describe what causes shifts in production possibilities curves. • Define absolute and comparative advantage. • Define specialization and explain why people specialize. • Explain how the gains from trade follow from comparative advantage © 2014 by McGraw‐Hill Education 2 Who produces which goods and why? • People around the globe coordinate production activities to sell to consumers what they want. • The global production is a natural outcome of people everywhere acting in their own self‐ interest to improve their own lives. • Economists call this coordination mechanism the invisible hand. © 2014 by McGraw‐Hill Education 3 1 Production possibility • One way to understand the invisible hand is the production possibility model. – Two groups: producers and consumers. – Two goods being produced. – Each producer has their own production technology. • Technology can be proprietary. • Model analyzes who produces which goods. © 2014 by McGraw‐Hill Education 4 The production possibility frontier A country’s production capabilities can be modeled using the production possibilities frontier (PPF). Millions of bushels of wheat The . can make 4 million bushels of wheat. 5 4 A 3 B 2 C The . can also produce these combinations of wheat and shirts OR 2 million shirts. 1 D E 0 1 3 2 Shirts (millions) Production Possibilities Bushels of Wheat (millions) A 4 0 B 3 C 2 D 1 E 0 2 Millions of shirts © 2014 by McGraw‐Hill Education 5 Production possibility frontier The production possibilities frontier is the line or curve that shows all possible combinations of two outputs that can be produced using all available resources. Millions of bushels of .
