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Chapter 2

Economics 1021A/B Chapter Notes - Chapter 2: Allocative Efficiency, Marginal Utility, Marginal Cost

Course Code
ECON 1021A/B
Michael Parkin

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Microeconomics- Chapter 2
Production Possibilities and Opportunity Cost
quantities of goods and services that we can produce are limited both by our available
resources and by technology
increase production of one good, must decrease production of something else: a tradeoff
production possibilities frontier (PPF) is the boundary between those combinations of goods
and services that can be produced and those that cannot
focus on two goods, hold quantities of other goods constant
PPF illustrates scarcity because we cannot attain the points outside the frontier
points outside the frontier describe wants that can’t be satisfied
can produce any point inside the PPF or on the PPF, these points are attainable
Production Efficiency
production efficiency- produce goods and services at the lowest possible cost
occurs at all points on the PPF
points inside the PPF, we are giving up more than necessary of one good to produce a given
quantity of the other good
production is inefficient inside PPF- resources are either unused or misallocated
unused- resources are idle but could be working
misallocated- resources are assigned to tasks for which they are not suited
Tradeoff Along the PPF
we can employ resources to produce goods and services, but are limited in what we can
there is a boundary between what we can attain and what we cannot attain
Opportunity Cost
opportunity cost of an action is the highest-valued alternative forgone
i.e. opportunity cost of producing an additional pizza is the cola we must forgo
opportunity cost is a ratio- decrease in the quantity produced of one good divided by the
increase in the quantity produced of another good
opportunity cost of producing an additional can of cola is equal to the inverse of the
opportunity cost of producing an additional pizza
outward-bowed shape of the PPF reflects increasing opportunity cost
when we produce a large quantity of cold and small quantity of pizzas, frontier has gentler
PPF is bowed outward because resources are not all equally productive in all activities
PPF and Marginal Cost
when goods and services are produced at the lowest possible cost and in quantities that provide
greatest possible benefit, we have achieved allocative efficiency
marginal cost of a good is the opportunity cost of producing one more unit of it
Preferences and Marginal Benefit
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