ECON 1021 – CHAP 2 Product Possibilities and Opportunity Cost Production

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Western University
Economics 1021A/B
Jeannie Gillmore

ECON 1021 – CHAP 2 Product Possibilities and Opportunity Cost Production Possibilities Frontier (PPF) – boundary b/w those combo of goods and services that can be produced and those that cannot  PPF illustrates scarcity b/c we cannot attain points outside frontier   these points are wants that cannot be satisfied  can produce at any point inside/on PPF Product Efficiency – achieved if we produce goods/service at lowest cost  occurs at all points ON ppf  used up resources  inefficient inside ppf  resources unused/misallocated  every choice along PPF involves a tradeoff  all tradeoff involves  opportunity cost  eg. Move point C – D,  1 mil more pizza but 3mil fewer cola  additional 1mil pizza cost 3 mil cola – 1 pizza cost 3 cans of cola  opportunity cost of producing additional can = inverse of opp cost of producing additional pizza  opportunity cost – ratio – decrease in quantity produced of one good divided by increase in quantity produced of other good Allocative Efficiency – goods/services produced at lowest cost in quantities providing greatest benefit Marginal Cost – opportunity cost of producing one more unit of it  calculated from slope of PPF  quantity increase – ppf steeper – marginal cost increase  when produce x number of pizzas – cost is how many less x number of cola produced  eg. 1m pizza – cost 1 mil cola Marginal benefit – benefit received from consuming one more unit of it  subjective – depends on preferences  marginal benefit/preferences sharp contrast to marginal cost/production possibilities  marginal benefit curve – shoes relationship b/w marginal benefit from good and quantity consumed – unrelated to pff – cannot be derived from it  marginal benefit – most that people willing to pay for additional unit  principle of decreasing marginal benefit - more good/service  smaller marginal benefit  less willing to pay Allocative Efficiency  at any point on PPF – cannot produce more of one good without giving up another  BEST point on ppf – cannot produce more of one good without giving up some other good that provides greater benefit  producing at point of allocative efficiency Economic Growth – expansion of production possibilities  Increases standard of living – doesn’t over come scarcity to avoid opp cost Technological change – development of new good and of better ways of producing goods and services Capital Accumulation – growth of capital resources including human capital  To expand production possibilities in future – nation must devote fewer resources to produce cu
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