ECON 1010 Lecture Notes - Lecture 11: Opportunity Cost, Marginal Cost, Allocative Efficiency

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17 Dec 2018

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Marginal cost of a good or service is the opportunity cost of producing one more unit of it. Marginal benefit of a good or service is the benefit received from consuming one more unit of it. Measured by amount a person is willing to pay for an additional unit. Decreasing marginal benefit more # of goods= smaller marginal benefit and less we are willing to pay for an additional unit. Allocative efficiency- we cannot produce a good without giving up another good that we value more. Allocative efficiency= point on ppf where marginal benefit intersects with marginal cost. Absolute advantage- producing product/service at lower absolute cost than other producers (productivity in time) Comparative advantage- producing product/service at lower opportunity cost than other producers (what you give up to specialize) Key to comparative advantage is for both parties to mutually benefit from the trade.

Related Questions

1. the marginal cost curve is

A. Downward sloping to reflect the bowed out PPF.

B. Downward sloping as marginal benefits increase.

C. Upward sloping because marginal cost falls as more of a good or service is produced.

D. Upward sloping to reflect the increasing opportunity cost of producing one more unit.

E. U-shaped to reflect the bowed out PPF.

2. Allocative efficiency occurs

A. Anywhere inside or on the production possibilities frontier.

B. When the total cost of production is minimized

C. At all points on the production possibilities frontier.

D. At only one point on the production possibilities frontier.

E. At the points where the production possibilities frontier crosses the horizontal or vertical axis.

3. Auditors working for a large accounting firm are often away from the office. When they are in the office, they are allowed to use any desk that is available. Which method is used to allocate desks?

A. lottery

B. first-come, first-served

C. Command

D. Contest

E. Sharing equally

4. The marginal cost of a good or service

A. Can be calculated from the marginal benefit of that good or service.

B. decreases as more of the good or service is produced.

C. Can be derived from the production possibilities frontier.

D. Graphs as a positively sloped curve, so it cannot be derived from the production possibilities frontier, which is downward sloping.

E. None of the above answers is correct.

5. The maximum amount of other goods and services that people are willing to give up in order to get one more unit of a good is defined as the good's

A. Marginal benefit.

B. Total benefit.

C. Marginal cost

D. Total cost.

E. Price.

What is the comparative advantage?

I. The gain from selling a product for more than it costs to produce that product.

II. The gain from consuming a product whose benefit is greater than its cost.

III. The ability of trading partners to produce goods or services at a lower opportunity cost than others.

IV. The ability to produce more of a good or service than competitors using the same amount of resources.

V. The ability to use all available resources to produce output.

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

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ECON 1010 Lecture Notes - Lecture 11: Opportunity Cost, Marginal Cost, Allocative Efficiency

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