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Chapter 2

01.09.14 Chapter 2.docx

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ECON 1116
Osborne Jackson

01/09/2014 Chapter 2: Tradeoffs pg. 25-35, 40-61 Model: a simplified representation of a real situation that is used to better understand real-life situations - Important because their simplicity allows economist to focus on the effect of only one change at a time. Other things equal assumption: means that all other relevant factors remain unchanged. Trade-offs: The Production Possibility Frontier: Production possibility frontier: illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other. (Simple model used to demonstrate the effect of scarcity of productive resource) a. Points inside the PPF are wasteful, productive resources remain unused. (Interior allocation as inefficient). a. Corresponds to our notion of Pareto efficiency. Points on boundary of PPF are efficient. All productive resources are used to maximize output. - Production: is the process of transforming factors of production (inputs) into goods and services (outputs). - Helps us understand some aspects of the real economy better than we could without the model: efficiency, opportunity cost, and economic growth. a. Efficiency: - Economy is efficient if there are no missed opportunities—there is no way to make some people better off without making other people worse off. o No missed opportunities in production, no way to produce more of one good without producing less of other goods.  If the economy as a whole could not produce more of any one good without producing less of something else if it’s on the production possibility frontier, then we say the economy is efficient in production.  Efficiency also requires that the economy allocate its resources so that consumers are as well off as possible. If an economy does this, we say that I is efficient in allocation. b. Opportunity Cost: c. Economic Growth: 01/09/2014 Chapter 2: Tradeoffs pg. 25-35, 40-61 o Factors of production: resources used to produce goods and services. (Can lead the PPF to shift onward is an increase of this). o Technology: the technical means for producing goods and services. (Source of economic growth is progress in this). o PPF is a very simplified model of an economy. Yet it teaches us important lessons about real-life economies. Gives us our first clear sense of what constitutes economic efficiency, and it illustrates the concept of opportunity cost, and it makes clear what economic growth is all about. Comparative Advantage and Gains from Trade: - Comparative advantage: if producer A has a lower opportunity cost of producing a good than producer B, we say that Producer A has a comparative advantage in production in that good. - Absolute advantage: if A can produce more output per worker than B. Likewise and individual has an absolute advantage in producing a good or service if he or she is better at producing it than other people. Having an absolute advantage is not the same thing as having a
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