The production possibility curve measures the maximum combination of outputs that can be obtained from a given number of inputs. It embodies the opportunity cost concept.
In general, in order to get more and more of something, we must give up ever-increasing quantities of something else. This is the principle of increasing marginal opportunity cost.
Trade allows people to use their comparative advantage and shift out society's production possibility curve.
The rise of markets coincided with significant increases in output. Specialization, trade, and competition have all contributed to the increase.
Points inside the production possibility curve are inefficient, points along the production possibility curve are efficient, and points outside are unattainable.
By specializing in producing those goods for which one has a comparative advantage (lowest opportunity cost), one can produce the greatest amount of goods with which to trade. Doing so, countries can increase consumption. The effects of specialization and trade can also be shown by a shift of the production possibility curve out.
The typical outward bow of the production possibility curve is the result of comparative advantage and trade.
Because many goods are cheaper to produce in countries such as China and India, production that formerly took place in the United States is being outsourced to foreign countries.
If the United States can maintain its strong comparative advantage in goods using new technologies and innovation, the jobs lost by outsourcing can be replaced with other high paying jobs. If it does not, then some adjustments in relative wage rates or exchange rates must occur.
Outsourcing is a product of the law of one price, which reflects business's tendency to shift production to countries where it is cheapest to produce.
There is no central world government. Governments enter voluntary agreements that perform the role of regulating international markets.
Six roles of government are (1) to provide a stable set of institutions and rules, (2) to promote effective and workable competition, (3) to correct for externalities, (4) to ensure economic stability and growth, (5) to provide public goods, and (6) to adjust for undesirable market results.
