Textbook Notes (368,775)
Canada (162,159)
York University (12,867)
Economics (1,011)
ECON 1000 (397)
Chapter 2

Chapter 2- The Economic Problem.docx

3 Pages
97 Views
Unlock Document

Department
Economics
Course
ECON 1000
Professor
George Georgopoulos
Semester
Fall

Description
Chapter 2 - The Economic Problem (Pages 30-45) Production Possibilities and Opportunity Cost  Quantities of goods and services that we produce are limited by our available resources and by technology.  If we want to increase our production of one good, we must decrease production of something else (tradeoff)] Production Possibilities Frontier (PPF)  The boundary between those combinations of g/s that can be produced and those that cannot.  To show this, we focus on two goods at a time and hold the quantities produced of all the other g/s constants.  Look at a model economy, which everything remains the same except the production of the two goods we’re looking at.  The PPF shows scarcity sine we cannot produce points outside the frontier.  Can produce any point inside the PPF or on the PPF  Production Efficiency is achieved when we produce g/s at the lowest possible cost.  Occurs on points on the frontier (efficient)  Points inside PPF are inefficient because we are giving up more than necessary (resources are either unused or misallocated).  Every choice along PPF is a tradeoff (involves an opportunity cost)  Opportunity Cost of an action is the highest alternative valued forgone.  Opportunity cost is a ratio  From point E to F, pizza increases by 1 million, while cola decreased by 5 million.  Opportunity cost of the fifth 1 million pizzas is 5 million cans of cola. Therefore one of these pizzas cost 5 cans of cola or a can of cola cost is 1/5 a pizza. Increasing Opportunity Cost  Because resources are not 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. Using Resources Efficiently  To determine which of the alternative efficient quantities to produce, we compare costs and benefits. The PPF and Marginal Cost  The PPF determines opportunity cost.  The marginal cost of a good or service is the opportunity cost of producing one more unit of it.  Marginal cost calculated from the slope of PPF, as quantity of pizza increases, PPF gets steeper, marginal cost of producing pizza increases. Preferences and Marginal Benefit  The Marginal Benefit from a g/s is the benefit received from consuming one more unit of it. Depends on person’s preferences (their likes/dislikes and intensity of those feelings).  We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service.  The general principle is: that more we have of any good, the smaller its marginal benefit, the less we are willing to pay for an additional unit of it.  We call this general principle the principle of decreasing marginal benefit.  The marginal benefit curve shows the relationship between the marginal benefit of a good and the quantity of that good con
More Less

Related notes for ECON 1000

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