ECON 103 Lecture Notes - Allocative Efficiency, Marginal Utility, Marginal Cost

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Published on 19 Apr 2013
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Fraser International College
ECON1034 “Principles of Microeconomics”
Chapter 2: The Economic Problem
The KEY concepts in this chapter:
-Production possibilities frontier(what it shows, what it means, how to draw it with
the closed book)5+
-A graph for the marginal cost (what it shows, what it means)
-A graph for the marginal benefit (what it shows, what it means)
-Allocative efficiency
-Absolute advantage and comparative advantage
The economic problem is the problem of scarcity:
Scarcity occurs when there is excess of human wants over what actually is produced.
The production possibilities frontier illustrates the concepts of scarcity and opportunity
cost.
Production possibility curve
The production possibility curve or frontier shows the combination of two or more goods that
can be produced by using the best resources available.
Each point on production possibility frontier shows the combination of goods produced by using
the resources efficiently.
The point inside the PPF are attainable but it shows that resources are used inefficiently while the
points outside the PPF are unattainable currently as due to lack of resources available but can
easily be achieved if more resources are employed.
Attainable points are
The point on the PPF are attainable and shows that resources are used efficiently
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The point inside the PPF are attainable but it shows that resources are used inefficiently
These points are attainable because
Less Resources can be used to produce them.
Unattainable points are
the points outside the PPF are unattainable currently as due to lack of resources available but can
easily be achieved if more resources are employed.
These points are unattainable because
As due to lack of resources available but can easily be achieved if more resources are employed
and due to scarcity.
Efficient points are
The point on the PPF are attainable and shows that resources are used efficiently
These points are efficient because
The points are efficient because the resources are available to produce them.
Inefficient points are
Are the points which are inside the PPF
These points are inefficient because
The points are inefficient because the resources are inefficiently used or not properly managed.
Tradeoffs along the PPF and the opportunity cost
The tradeoffs and opportunity cost is involved in the PPF in the sense that as due to scarcity the
firms have to make choices to decide which product either X or Y to produce as if the produce
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more of Y then they do tradeoff and as well as the quantities which they had left of X indicates it
is opportunity cost of producing Y.
Opportunity cost is a ratio:
Give-up/Gain
Opportunity cost is increasing along the PPF:
In the way that as when we are producing more of good and we are leaving the other one then the
opportunity cost is increasing of that product.
Opportunity cost is increasing along the PPF because resources are not equally productive
in making the two goods.
Efficiency occurs when the society makes best or optimal use of scarce resources to satisfy
most wants and needs.
Productive efficiency:
It is achieved when output is produced at minimum average total cost.
Allocative efficiency:
Allocative efficiency is reached when no one can be made better off without making
someone else worse off.
It occurs when price is equal to Marginal Cost or P=MC
As this can be fully checked by using the PPF , as if we have to produce more of one good
we have to give up other good.
Allocative efficiency is found by comparing marginal costs and marginal benefits.
Recall: the marginal cost of a good is the cost of producing one more unit of it.
The marginal cost of a good is also the opportunity cost of producing one more unit of it.
The marginal cost is calculated from the slope of the PPF.
But how to know the marginal benefit of having more of one good or more of another
good?
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