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Lecture

Class note Fall 2010_CH2 Completed note

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Department
Economics
Course
ECON 102
Professor
Angela Trimarchi
Semester
Fall

Description
2-1 CHAPTER 2 The Economic Problem All economies focus on two things: - Production - Consumption - Ultimately, the level of production will determine the level of consumption 2-2 Production Possibilities Frontier: - All possible combinations of outputs that can be produced with given inputs and technology. Question: What is another name for inputs? Ans: Resources 2-3 Diagram of the Production Possibilities Frontier 2-4 Attainable Versus the Unattainable Region Label the Attainable Region : A,E,D.B Label the Unattainable Region: C,G 2-5 Inefficient Points What is the opportunity cost of moving from pt E to X? - The slope of the PPF gives the opportunity cost of producing one more unit of the good on the x-axis 2-6 Characteristics of the Production Possibilities Frontier (PPF) - Downward slopping - Points outside the PPF are currently unattainable - Points on and inside the PPF are attainable - Points inside the PPF are inefficient - Points on the PPF are efficient Definition: Efficiency: Society getting the most it can from its scarce resources Sometimes in an economy the goals of equity and efficiency conflict Equity: Trying to help poor groups in society get an equal distribution of income (or an equal slice of the economic pie) 2-7 Slope of the PPF o Exercise: o Calculate the slope of the PPF below and indicate the opportunity cost of producing one more unit of Good X Good Y 10 a 8 b Good X 0 20 3 2-8 Reciprocal of the Slope of the PPF o Exercise: o Calculate the reciprocal of the slope of the PPF below and indicate the opportunity cost of producing one more unit of Good Y Good Y a 10 b 8 Good X 2 3 2-9 Constant Opportunity Costs Production Possibilities Schedule for Bottles of Water and CDs Point Bottles of Water CDs A 0 10 B 1 8 C 2 6 D 3 4 E 4 2 F 5 0 o Graph the production possibilities schedule and comment on its shape (next page) 2-10 Constant Opportunity Costs CDs a 10 b 8 c 6 d 4 e 2 f 0 1 2 3 4 5 BW Constant Opportunity Cost: Opportunity costs are constant because resources are not specialized They are good at producing both goods Resources are homogenous homogenous : Resources are identical, can be replaced by each other 2-11 Increasing Opportunity Costs Production Possibilities Schedule for Bottles of Water and CDs Point Bottles of Water CDs A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0 o Graph the production possibilities schedule and comment on its shape (next page) Increasing Opportunity Cost: Opportunity costs are not constant because resources are specialized They are not good at producing both goods Resources are not homogenous 2-12 Increasing Opportunity Costs CDs a b c d e f BW 2-13 Economic Growth
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