Microeconomics: Theory and Applications with Calculus, 4e

10.4 Production and Trading

So far our discussion has been based on a pure exchange economy with no production. We now examine an economy in which a fixed amount of a single input can produce two different goods.

Comparative Advantage

Jane and Denise can produce candy or chop wood using their own labor. However, they differ as to how much of each good they can produce in a day.

Production Possibility Frontier.

 

Jane can produce either three candy bars or six cords of firewood in a day. By splitting her time between the two activities, she can produce various combinations of the two goods. If t is the fraction of a day she spends making candy and $1-t$[&1|-|t&] is the fraction she spends cutting wood, she produces 3t candy bars and $6(1-t)$[&6(1|-|t)&] ...