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Lecture 2

Economics 1021A/B Lecture Notes - Lecture 2: Nec, W. M. Keck Observatory, Technological Change

Course Code
ECON 1021A/B
Michael Parkin

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The economic problem
Production possibilities frontier (PPF) boundary between those combinations of goods
and services that can be produced and those that cannot
oSimplify view of economy and focus on only two goods at a time
oHold the quantities of all other goods and services constant (ceteris paribus)
oAny point on the curve and inside the PPF are attainable
oAny points outside the curve are unattainable
oPPF bows outward
Because resources are not equally productive in all activities
Production efficiency
oOccurs when we cannot produce more of one good without producing less of
some other good
oPoints on the frontier are efficient
oPoints inside the curve are inefficient
Resources are either unemployed or misallocated
oSacrifice one thing to get another
oEvery choice on the PPF involved a tradeoff
Opportunity cost
oThe opportunity cost of an action is the highest valued alternative foregone
oThe benefits you could have received by taking an alternative action
oSlope of the PPF is what describes the opportunity cost
oOpportunity cost is a ratio
Inverse ratios
oIncreasing opportunity cost
Opportunity cost goes up as you approach the end of the curve
Takes more resources to produce goods and services
Allocative efficiency
oWhen goods and services are produced at the lowest possible cost and in the
quantities that provide the greatest possible benefit
oWe cannot produce more of any one good without giving up some other good, we
have achieved production efficiency
oMarginal benefit = marginal cost
Marginal cost
oThe marginal cost of a good is the opportunity cost of producing one more unit of
oCalculate it from the slope of the PPF
Marginal benefit
oBenefit received from consuming one more unit of it
oSubjective, depends on people’s preferences
oThe more we have of any good, the smaller is its marginal benefit
oThe less we are willing to pay for an additional unit
oWe call this general principle the principle of decreasing marginal benefit
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