Category Archives: Macroeconomics

In class we glossed over the slide which shows a typical real production possibilities curve for an economy with many workers or participants.

The basic question is

Why is the production possibilities curve bowed outward from the origin?

The explanation is important. We call such a “curve convex to the origin” in the language of calculus of two variables.

Remember that economically literate members of the economy will (or should!) switch the workers with the lowest opportunity cost on the y-axis commodity to work on production of the x-axis commodity. This means there will be at first less than average loss of production on the y-axis. later on, as more are switched, they have higher opportunity costs on the y-axis commodity. That means the reduction in production on the y-axis will be more– the slope will be smaller (well, it will be a larger number in absolute value, but more negative– we call that smaller in math!) and so the curve will drop more. finally as the last worker is moved to production of the commodity on the x-axis, he or she is the most productive (highest opportunity cost) on the y-axis, and so the slope will be steepest there.

So the shape is a direct consequence of the low-hanging fruit principle– always switch people with lowest opportunity cost first! See page 48 in your book for a complete explanation!

It’s true there are no graphs on the homework answers for Chapter 3. That is not exactly an error. There are no additional graphs given in the answer book I have. The answers given do say how to move the line to get the answer, so any such revision of the graph given in the assignment itself would be an answer.

Here’s what I am thinking about for the exam on September 25th at our regular class time.

Chapters 1, 2, 3. Emphasis in chapter 3 on simple supply and demand curves and movement of them in response to economic factors.

Chapter 1: What does economics study? What is economic naturalism? Apply it to a simple situation. What are the four pitfalls and how do they apply to simple decision situations one might face? What is marginal cost and marginal benefit? Use it in a situation. What is the difference between normative and positive economic statements?
Chapter 2: What is absolute advantage, how do we calculate it? What is comparative advantage, how do we calculate it? Why should we do the things where we have comparative advantage? What is the production possibilities curve, how do we draw it from certain data, and interpreting efficient points and so on. What is the slope of the production possibilities curve– interpret it! What happens if technology allows an increase of productivity? Working problems!

Chapter 3: How to plot a demand curve from data. How to plot a supply curve. How to find equilibrium price and quantity using a graph or using algebra if you have equations. Demonstrate excess supply or excess demand on a graph. What might cause it (examples)? What does it mean when the graph of supply or demand moves to the left or right? What factors might cause such a move? What is the economic surplus, consumer and producer, and how do we find it on a graph? Why do we say that the equilibrium is economically efficient? What is left out of the picture when we have economic efficiency? Is equilibrium better for society? Under what conditions? Work plenty of problems for this chapter.