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Lecture 2

Lecture 2 on Economic Problems

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ECON 1000
Steven Edwards

CH. 2 ECONOMIC PROBLEM LECTURE NOTES ECON PRODUCTION POSSIBILITIES CURVE Opportunity Cost Efficiency Scarcity Trade-Off - Out of the possibilities on the curve which is the best to choose? - Only way to have more than one is taking away from other resources in the society. - Opportunity cost to make more of one product becomes steeper and increases as more of that one product is created. - Preferences are a description of a persons likes and dislikes - Marginal benefit is the amount of money willing to be paid by adding more of that unit - More we have of one good the smaller the marginal benefit… less we are willing to pay for it - Principle of Decreasing Marginal Benefit is illustrated by this. - The Curve shows the relationship between marginal benefit and the quantity of that consumed good. - The marginal benefit curve is downward sloping (top left to bottom right) because the marginal benefit decreases as more of that product is consumed (I,e. water on a hot, sunny day) - The willingness to pay decreases as you consume more. - Allocative Efficiency: The optimal combination for two products to be manufactured that uses our resources the most efficiently. The point on the Production Possibilities Frontier preferred above all others - An economy is producing resources efficiently when the marginal benefit of the product is equal to the marginal cost of the product (when they intersect) - Any economic system strives to do one thing, grow economically CH. 2 ECONOMIC PROBLEM LECTURE NOTES ECON - Economic Growth increases standards of living but it doesn’t avoid scarcity or opportunity cost - Capital Accumulation- The growth of capital resources, which includes human capital. Technological Change- Development of new goods and of better ways of producing goods and services. - To use resources in R&D we must decrease our production and consumption of goods and services - Opportunity cost of economic growth is less current consumption - Economic growth is not free, it involves resources and the opportunity to do other activities. - Productive Efficiency: When we produce at the lowest possible cost on the production possibilities frontier - Comparative Advantage: Activitiy if a person can perform it at a lower opportunity cost than anyone else. - Absolute Advantage: Person is more productive than others in some or all activities - Absolute advantage measures productivities while comparat
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