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Lecture

ECON 101 Lecture Notes - Allocative Efficiency, Marginal Utility, Opportunity Cost


Department
Economics
Course Code
ECON 101
Professor
Corey Van De Waal

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! ! ECON!101!!004:!Chapter!2!
Economic'Problem'
Tuesday,!September!21,!2010!
!
Life!is!good!and!getting!better.!But!we!all!face!costs!and!must!choose!what!we!think!is!best!for!
us.!This!chapter!sharpens!the!concepts!of!scarcity!and!opportunity!cost.!It!introduces!the!idea!of!
economic!efficiency.!It!also!explains!how!we!can!expand!production!by!accumulating!capital!and!
specializing!and!trading!with!each!other.!
!
Production'Possibilities'and'Frontier'(PPF)'
J Describes!the!limit!to!what!we!can!produce!and!provides!a!neat!way!of!thinking!about!and!
illustrating!the!idea!of!a!tradeoff.!!
J Is!the!boundary!between!those!combinations!of!goods!and!services!that!can!be!produced!
and!those!that!cannot.!
J To!illustrate!the!PPF!we!focus!on!two!goods!at!a!time!and!hold!the!quantities!produced!of!all!
the!other!good!and!services!constant.!
J We!look!as!a!model(economy!in!which!everything!remains!the!same!except!for!the!
production!of!the!two!goods!are!considering.!
J Points!outside!of!the!PPF!line!are!unattainable'and!everything!within!the!PPF!line!is!
attainable!
J Determines!opportunity!cost,!marginal!cost,!and!marginal!benefit!!
!
Production'Efficiency'
J A!situation!in!which!goods!and!services!are!produced!at!the!lowest!cost!possible.!
J All!points!on'the'line'are'efficient!&!all!points'inside'the'line'are'inefficient!
J Production!is!inefficient!inside!the!PPF!because!resources!are!either!unused!or!misallocated!
>!products!are!unused!when!they!are!idle!but!could!be!working!!
>!resources!are!misallocated!when!they!are!assigned!to!tasks!for!which!they!are!not!the!best!
match!
!
Tradeoff'Along'the'PPF#
J Choices!along!the!PPF!involve!a!tradeoff!
J By!using!our!available!technologies,!we!can!employ!these!resources!to!produce!goods!and!
services,!but!we!are!limited!in!what!we!can!produce.!
J This!limit!defines!a!boundary!between!what!we!can!attain!and!what!we!cannot!attain.!
J This!boundary!is!the!real!world’s!PPF,!and!it!defines!the!tradeoffs!that!we!must!make.!
J We!can!produce!more!of!an!one!good!or!service!only!if!we!produce!less!of!some!other!good!
or!service!
J EXAMPLE:!Prime!Minister!wants!to!spend!more!on!education!and!health!care,!he!faces!a!
tradeoff:!more!education!and!health!care!for!less!nation!defence!!
!
Opportunity'Cost'
J The!highest!valued!alternative!we!give!up!to!get!something!else!
J PPF!allows!us!to!calculate!opportunity!cost!
J On!PPF,!there!are!two!goods;!therefore,!there!is!only!one!alternative!forgone!
J Because!resources!are!not!all!equally!productive!in!all!activities,!the!PPF(bows!outwardis!
concave!from!the!origin!
J The!outward!bow!of!the!PPF(means!that!as!the!quantity!produced!of!each!good!increases,!so!
does!its!opportunity!cost.!
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