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Economics 1021A/B Study Guide - Human Capital, Allocative Efficiency, Marginal Cost


Department
Economics
Course Code
ECON 1021A/B
Professor
Jeannie Gillmore

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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
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