Lecture Three: Using Resources Efficiently
September 20, 2011
Using Resources Efficiently
Allocative efficiency - when the marginal benefit is the same as the marginal cost
Production Efficiency - when your production level is somewhere on the PPF
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:
- investing (the firm taking the money to pay for capital items such as equipment),
financial investing (putting money in the bank)
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