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ECON 1000
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Chapter 2 – The Economic Problem The quantities of goods and services that we can produce are limited both by our available resources and by technology.  If we want to increase the production of one good, we must decrease our production of something else (tadeoff) The production possibilities frontier (PPF) - the boundary between those combinations of goods and services that can be produced and those that cannot  To illustrate the PPF, we focus on two goods at a time and hold the quantities produced of all the other goods and services constant.  The PPF illustrates scarcity because we cannot attain the points outside the frontier, those points describe wants that can’t be satisfied  We can produce at any point inside the PPF or on the PPF since these points are attainable. Production efficiency – when we produce goods and services at the lowest possible cost  This occurs at all the points on the PPF Points inside the PPF, production is inefficient because we are giving up more than necessary of one good to produce a given quantity of the other goods.  Production is inefficient inside the PPF because resources are either unused or misallocated or both o Resources are unused when they are idle but could be working o Resources are misallocated when they are assigned to tasks for which they are not the best match Each choice along the PPF involves a tradeoff; at any given point in time, we have a fixed amount of labour, land, capital, and entrepreneurship  By using our available technologies, we can employ these resources to produce goods and services, but we are limited by what we produce. The limit defines the boundary between what we can attain and what we cannot attain.  We can produce more of any one good or service only if we produce less of some other goods or services Opportunity cost – the highest valued alternative forgone. It is a ratio; it is the decrease in the quantity produce of one good divided by the increase in the quantity produced of another good as we move along the PPF Opportunity cost = what you lose / what you gain  The more of either good we try to produce, the less productive are the additional resources we use to produce that good and the larger is the opportunity cost of a unit of that good We achieve production efficiency at every point on the PPF, the best point is the point on the PPF at which goods and services re produced in the quantities that provide the greatest possible benefit Allocative efficiency – when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit Marginal cost of a good – the opportunity cost of producing one more unit of it  Quantity of pizzas increases, the PPF gets steeper, and the marginal cost of pizza increases  Illustrated through the PPF Preferences – a description of a person’s likes and dislikes (marginal benefit) Marginal benefit from a good or service – the benefit received from consuming one more unit of it  Measured by the most that people are willing to pay for an additional unit of it  Illustrated through the marginal benefit curve – a curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good  The more we get of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it (the principle of decreasing marginal benefit) o The more we consume of any good, the more we tire it, and want to switch To achieve allocative efficiency, we must produce at the point where marginal benefit equals , marginal cost so that our resources are used effectively and consumer’s are willing to pay the max for one more good Economic growth – expansion of production, increases standard of living but it doesn’t overcome scarcity or opportunity cost  The faster the production grows the greater the opportunity cos
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