ECON101 Lecture Notes - Lecture 2: Allocative Efficiency, Opportunity Cost
Increasing Opportunity Cost
ļ· The Opportunity Cost of pizza increases as the quantity of pizza produced increases
ļ· The outward bowed shape of PPF reflects the increasing Opportunity Cost
ļ· Frontier steep: A large increase in the production of pizza costs a large decrease in coke
production so Opportunity Cost is high
ļ· PPF is bowed since resources are not all equally productive in all activities
ļ· If coke experts move to make pizza there is a small increase in pizza but a large decrease in coke
ļ· Produce more of one good, must use resources that are less suited to that activity and more
suited to producing the other good ā increasing Opportunity Cost
ļ· Rate of productions increases = increase in Opportunity Cost
Using Resources Efficiently
ļ· What point on PPF to produce? A- the point on PPF at which goods and services are produced in
the quantities that provide the greatest possible benefit
ļ· When goods and services are produced at the lowest possible cost and in the quantities that
provide the greatest possible benefit = achieved allocative efficiency
The PPF and Marginal Cost (MC)
ļ· The Opportunity Cost of producing one more unit
ļ· Calculate MC from the slope of PPF
ļ· More pizzas produced, PPF gets stepper, MC of pizza increases
Preferences and Marginal Benefit (MB)
ļ· MB from goods and services: the benefit received form consuming one more unit of it
ļ· Benefit is subjective depending on preferences
ļ· MB and preferences stand in sharp contrast to MC and production possibilities
o Preferences: what people want
o PP: limits and constraints whatās feasible
ļ· Illustrate preferences using Marginal Benefit Curve: MB from a goods and services consumed vs.
the quantity consumed of the goods and services - unrelated to PPF
o Measure MB by seeing the most one is willing to pay for an additional unit
o The most you are willing to pay for something is its MB
ļ· The principle of decreasing MB: the more we have of good ā smaller MB ā willing to pay less for
additional unit
o We like variety ā more of a good we get bored and want something else
ļ· MB measured by what you are willing to pay is the quantity of other G+S you are willing to forgo
Allocative Efficiency
ļ· Best point on PPF (allocative efficiency): cannot produce more of G without giving up some
other G that provides a greater benefit
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The opportunity cost of pizza increases as the quantity of pizza produced increases. The outward bowed shape of ppf reflects the increasing opportunity cost. Frontier steep: a large increase in the production of pizza costs a large decrease in coke production so opportunity cost is high. Ppf is bowed since resources are not all equally productive in all activities. Produce more of one good, must use resources that are less suited to that activity and more. If coke experts move to make pizza there is a small increase in pizza but a large decrease in coke suited to producing the other good increasing opportunity cost. Rate of productions increases = increase in opportunity cost. A- the point on ppf at which goods and services are produced in the quantities that provide the greatest possible benefit. When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit = achieved allocative efficiency.