Textbook Notes (368,222)
Canada (161,714)
Economics (818)
ECON 1050 (382)
Chapter 2

Chapter 2.docx

4 Pages
60 Views
Unlock Document

Department
Economics
Course
ECON 1050
Professor
Eveline Adomait
Semester
Fall

Description
Chapter 2: the economic problem Production Possibilities and Opportunity Cost -To increase our production of one good we must lower the production of another; a tradeoff -Production possibilities frontier (ppf): the boundary between those combinations of goods and services that can be produced and those that cannot -We always want things better and faster Production possibilities frontier -The ppf shows what we can and cannot produce -Focuses on 2 goods at a time and holds quantities of all other goods and services consistent -A model economy where everything remains the same (ceneris paribus); except the 2 goods we’re considering -The ppf sows scarcity because we cannot attain points that are outside of the frontier Production Efficiency -Production efficiency is achieved when we produce goods and services at the lowest possible cost -Points inside the ppf are inefficient because the necessary of one good is being given up to produce the other, such as Z The production is inefficient because resources are unused, misallocated or both. Ex. Workers unemployed, idle factories Unused when idle, misallocated when assigned to tasks which aren’t the best match, as they are at point Z -We have achieved production efficiency when we cannot produce more of one good without producing less of another Tradeoff along the PPF -every choice along the ppf involves a tradeoff -at any given point in time we have a fixed amount of labour, land, capital, and entrepreneurship -all tradeoffs involve a cost; an opportunity cost -once at production efficiency we face tradeoffs Opportunity Cost -the opportunity cost is the highest value alternative forgone -the opportunity cost of producing additional good B is the amount of good A that we must forgo -Because not all resources are equally productive in all activities the ppf bows outward -The outward bow of the PPF means that as the quantity produced of each good increases, so does its opportunity cost Opportunity Cost is a Ratio -Decrease in quantity produced of one good divided by the increase in production of another as we move along the ppf -Because opportunity cost is a ratio, the opportunity cost of producing additional good A is the inverse of producing additional good B Increasing Opportunity Cost -the opportunity cost of good A increases as the quantity produced increases -the more of either good we try to produce the less productive are the resources we use to produce that good and the larger the opportunity cost Using Resources Efficiently -all points on ppf are efficient -we achieve efficiency at every point, but which point is best? the point where goods and services are produced in quantities that provide the greatest possible benefit -allows us to achieve allocative efficiency The ppf and marginal cost -the marginal cost of a good is the opportunity cost of producing one more unit of it and is calculated through the slope of the ppf - as the quantity produced goes up, the ppf gets steeper and marginal costs increase continuously/steadily -the marginal cost increases as quantity produced increases Preferences and Marginal Benefit -Preferences are a description of a persons likes and dislikes -In order to describe preferences economists use concept of marginal benefit and marginal benefit curve -Marginal benefit: the benefit received form consuming one more unit -measured by the MOST people are willing to pay or an additional unit -we illustrate preferences with a marginal benefit curve shows relationship between marginal benefit and quantity consumed -principle of decreasing marginal benefit  marginal benefit decreases when we consume more because we like variety -The curve slopes downward to reflect the principle of decreasing marginal benefit. Allocative Efficiency - When we cannot produce more of any one good without giving up some other good, we have achieved production efficiency. - We are producing at a point on the PPF. - When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency. - We are producing at the point on the PPF that we prefer above all other points. - Example: if we produce 2.5 million pizzas marginal benefit and cost are both 3 cans of cola - Allocation of resource
More Less

Related notes for ECON 1050

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit