ECON 1000 Lecture Notes - Lecture 2: Productive Efficiency, Opportunity Cost, Comparative Advantage
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Chapter 2: Fundamental Economic Questions and Gains from Specialization
1. People derive pleasure from consuming goods and services
a. Factors of production (FOP): inputs in the production process, broadly
categorized as land, labor, and capital
b. Goods and services (G&S): outputs of the production process (e.g. food, clothing,
shelter, healthcare, education, and entertainment)
c. Production: the process by which inputs (i.e. FOP) are transformed into an
output (i.e. G&S)
d. Households: consumers of G&S (households interact with firms by providing the
FOP—land, labor capital)
e. Firms: produce G&S for consumption by households
f. Circular flow diagram
i. Shows the movement of resources (input) between households and firms
(output) to create benefits from consumption for people
ii. Circular flow creates value for society so long as the households’ benefits
from consuming the finished G&S > burdens of supplying the FOP
1. At any point in time, productive resources are limited
iii. Society faces a tradeoff in terms of levels of output of G&S => having
more of 1 G&S is only possible if we get by with less of some G&S
2. Every society must address 3 basic economic questions
a. What to produce
i. Production decision
ii. Tradeoffs due to limited resources
b. How to produce
i. Resource use decision
c. For whom to produce
i. Distributional decision—who gets to consume which G&S
3. Production Possibilities Frontier
a. PPF/PPC—graph showing alternative ways that an economy can use its scare
resources (i.e. scarcity, trade-offs, opportunity costs, and efficiency)
i. Downward sloping nature of curve reflects tradeoff in production that
results from scarcity of resources
ii. The becomes steeper as we move down the curve, resulting from
allocating resources in the most efficient manner