Micro economic THE ECONOMIC PROBLEM讲解材料.ppt

2;Why does food cost much more today than it did a few years ago? One reason is that we now use part of our corn crop to produce ethanol, a clean biofuel substitute for gasoline. Another reason is that drought in some parts of the world has decreased global grain production. We use an economic model—the production possibilities frontier—to learn why ethanol production and drought have increased the cost of producing food. We also use this model to study how we can expand our production possibilities; how we gain by trading with others; and why the social institutions have evolved.;The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF, we focus on two goods at a time and hold the quantities of all other goods and services constant. That is, we look at a model economy in which everything remains the same (ceteris paribus) except the two goods we’re considering.;Any point on the frontier such as E and any point inside the PPF such as Z are attainable. Points outside the PPF are unattainable.;Production Efficiency We achieve production efficiency if we cannot produce more of one good without producing less of some other good. Points on the frontier are efficient.;Any point inside the frontier, such as Z, is inefficient. At such a point, it is possible to produce more of one good without producing less of the other good. At Z, resources are either unemployed or misallocated.;Tradeoff Along the PPF Every choice along the PPF involves a tradeoff. On this PPF, we must give up some cola to get more pizzas or give up some pizzas to get more cola.;Opportunity Cost As we move down along the PPF, we produce more pizzas, but the quantity of cola we can produce decreases. The opportunity cost of a pizza is the cola forgone.;In moving from E to F: The quantity of pizzas increases by 1 million. The quantity of cola decreases by 5 million cans. The opportunity