Economics 1021A/B Chapter Notes - Chapter 2: Absolute Advantage, Capital Accumulation, Comparative Advantage

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Chapter 2 Concepts/Definitions ECON 1021 09/19/15
Production Possibilities Frontier: The boundary between those combinations of goods and services that
can be produced and those that cannot
- To illustrate the PPF, we look at a modal economy in which the quantities produced of only 2
goods change, while the quantities produced of all the other goods and services remain the
same
- Shows the limits to the production of 2 goods given the total resources and technology available
to produce them
- Illustrates scarcity: the points outside the frontier are unattainable
- Any point on or inside the PPF can be produced
Production Efficiency: Achieved if we produce goods and services at the lowest cost
- Outcome occurs at all the points ON the PPF
- At points INSIDE the PPF, production is inefficient because we are giving up more than necessary
of one good to produce a given quantity of another good
- Production inside the PPF because resources are unused and/or misallocated
-Unused Resources: Resources that are idle but could be working
-Misallocated Resources: Resources that are assigned to tasks for which they are not the best
match
Tradeoff along the PPF
- A choice along the PPF involves a tradeoff
Opportunity Cost: The OC of an action is the highest-valued alternative forgone
- PPF makes this idea precise and enables us to calculate opportunity cost
- The opportunity cost of producing more of one good, on a PPF, is the amount of the 2nd good
that is foregone
- Opportunity cost is a Ratio
It is the decrease in the quantity produced of one good divided by the increase in the
quantity produced of another good, as we move along the PPF
The opportunity cost of producing an additional unit of one item is equal to the inverse
of the opportunity cost of producing an addition unit of another item
- The opportunity cost of one item increases as the quantity of it produced increases
The outward-bowed shape of the PPF reflects increasing opportunity cost
Allocative Efficiency: When goods and services are produced at the lowest possible cost and in the
quantities that provide the greatest possible benefit
- At the best point on the PPF, we cannot produce more of one good without giving up some
other good that provides greater benefit
Marginal Cost: Opportunity cost of producing one more unit of it
- M.C is calculated from the slope of the PPF
Marginal Benefit: The benefit received from consuming one more unit of it
Preferences: Peoples likes and dislikes and the intensity of those feelings
Marginal Benefit Curve: Curve that shows the relationship between the marginal benefit from a good
and the quantity consumed of that good
- MB and Preferences stand in sharp contrast to MC and Production Possibilities
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