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Chapter 2

Chapter 2 - The Economic Problem.docx

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ECON 1000
Ardeshir Noordeh

ECON 1000 September 19 & 24 , 2013 CHAPTER 2:  THE ECONOMIC PROBLEM Production Possbilities and Opportunity Cost • Production possibilities frontier/curve (PPF): boundary between those combinations of goods and services that can or can’t be produced Example of PPF • The goal of economics is to achieve production efficiency; when we cannot produce more of one good without producing less of some other good • Any point inside the frontier is inefficient. Resources are either misemployed or misallocated • Every choice along the PPF involves a tradeoff • Allocative efficiency is the point on the PPF at which marginal benefit equals, or intersects the marginal cost ECON 1000 September 19 & 24 , 2013 Economic Growth • Two key factors influence it: o Technological change: development of new goods and better ways of production o Capital accumulation: growth of capital resources, including human capital • Two types of growth o Neutral growth: affects all industries equally, parallel shift of PPF o Biased growth: affects certain industries, unequal impact Trade • Absolute advantage vs. comparative advantage o Absolute: better, quicker, cheaper o Comparative: lowest opportunity cost • Quantity demanded: is the amount that consumers plan to buy during a particular time period, and at a particular price • Law of demand: with other things remaining the same: the higher the price of a good, the smaller the quantity demanded and vice-versa ECON 1000 September 19 & 24 , 2013 o Results from  Substitution effect • When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases.  Income effect • When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantit
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