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Lecture 3

Lecture Three: Using Resources Efficiently

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ECON 1000
George Georgopoulos

Lecture Three: Using Resources Efficiently September 20, 2011 Using Resources Efficiently Efficiency Allocative efficiency - when the marginal benefit is the same as the marginal cost Production Efficiency - when your production level is somewhere on the PPF Economic Growth The expansion of production possibilities and increase in the standard of living is called economic growth. Two key factors that influence economic growth - technological change - capital accumulation Technological Change - the development of new goods and of better was of producing goods and services, Capital Accumulation - the growth of capital resources, which includes human capital (labour, the workforce) Cost of Economic Growth To use resources in research and development and produce new capital, we must decease our production of consumption goods and services, therefore economic growth is not free. The opportunity cost of economic growth is less current consumption There are three main things in which your money is used: - spending/consuming - investing (the firm taking the money to pay for capital items such as equipment), financial investing (putting money in the bank) - taxes Example In a theoretical scenario, there is a tradeoff between current consumption of pizzas or future production of pizza ovens. This means that current production of a consumer good, the pizza, is decreased so that in the future, we will be able to make more pizzas (due to the increased number of pizza ovens). Gains From Trade Comparative Advantage vs. Absolute Advantage A person has comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. A person has absolute advantage if that person is more productive than others, Absolute advantage involves comparing productivities while comparative advantages involves comparing opportunity costs. Government subsidies - when you produce outside your PPF because your are getting some of yo
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