http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Production Possibilities Curve

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Production Possibilities Curve

Constant Opportunity Cost Decreasing Opportunity Cost

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Absolute Advantage andComparative Advantage

• ABSOLUTE ADVANTAGE

One individual or nation can produce more output with the same resources as another individual or nation.

• COMPARATIVE ADVANTAGE

One individual or nation can produce a good at a lower opportunity cost than another

• EXAMPLES OF COMPARATIVE ADVANTAGE

Economics professor and secretary

Auto mechanic and medical doctor

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Determining ComparativeAdvantage (Output Method)

1. Which nation has an absolute advantage in producing corn?

2. Which nation has an absolute advantage in producing sunscreen?

3. Which nation has a comparative advantage in producing corn?

4. Which nation has a comparative advantage in producing sunscreen?

5. Should Mexico specialize in corn or sunscreen?

6. Should France specialize in corn or sunscreen?

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Movement Along a Demand Curve

As the price declines from P to P1, the quantity increases from

Q to Q1

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Shift in Demand

Increase in demand from D to D1 shows that at the same price (P), the quantity increased from Q to Q1

Factors that Shift Demand:

1. Number of Consumers

2. Price of complementary good

3. Price of substitute good

4. Consumer income

5. Expectations about income or prices

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Movement Along a Supply Curve

As the price declines from P1 to P, the quantity decreases from

Q1 to Q.

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Shift in Supply

Increase in supply from S to S1 shows that at the same price (P), the quantity increased from Q to Q1.

Factors that Shift supply:

1. Number of suppliers

2. Prices of resources used to produce good

3. Prices of related goods produced

4. Technology

5. Expectations about future prices

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Equilibrium Quantity and Price

What happens if the price is $10?

What happens if the price is $6?

What happens if the price is $8?

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Calculation of Price Elasticity of Demand

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Price Elasticity along a Demand Curve

http://apeconomics.ncee.netUnit 1 : MacroeconomicsNational Council on Economic Education

Effects of Different Demand Elasticities

Which demand curve is more inelastic?

What happens to the equilibrium price and quantity with an elastic demand curve if supply increases?

What happens to the equilibrium price and quantity with an inelastic demand curve if supply increases?