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Chapter 2

Microeconomics Chapter 2.docx

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Jennifer Berg

Microeconomics 200 - Wednesday, July 17th notes * The opportunity cost of producing a good is that we could have made another good instead. CriticalAssumption (PPF) - The PPF is concave (not a linear relationship) Slope goes from shallow -> steep alongside points on the PPF. Steeper slope gives up a higher opportunity cost. * Why are PPFS Concave? - Certain resources are suited towards producing specific goods. -> Some workers are specifically better at producing specific goods. At pointA, the opportunity cost is very low. (shallow slope) Points on the curve allocate all the available resources, whereas points below the curve do not, so they’re inefficient. Points inside the PPF are called productively inefficient. We have points inside the PPF which are inefficient because there could be people who aren’t specialized in making one good as the other good (making the goods they aren’t good at making) -> productive inefficiency = misallocation -> idle resources (caused by recessions) * Awell working economy values resources in such a way that they can end up on the PPF. ** The U.S isn’t on the PPF b/c of unemployment rates (8%) = Idle Resources Good allocation of resources = on the frontier of PPF (Potential GDP) Points outside (above the frontier) of the PPF are not possible, b/c of limited technology. Economic Growth: TechnologyAdvancement * PPF shifted upwards means technological advancement in terms of increasing production of capital goods (good y). In order words, slope increases -> greater opportunity costs. Though, if we reallocate, we could get to a place like point b; which has the same amount of consumer goods as point c (good x), but more capital goods (good y). * PPF shifted rightwards means technological advancement in terms of increasing production of (good x). In other words, slope decreases -> smaller opportunity costs. Though, if we reallocate, we could get to a place like point g; which has the same amount of DVD players (good y), but more MP3 players (good x). The Unbiased Shift *PPF stretched evenly and unbiased to both goods x and y, represents a same slope situation with no change in opportunity costs. However, production of goods x&y both increase. How to increase Growth * Increase capital goods (capital stock), but this comes with the opportunity cost of consumption goods. Physical and Human capital (either or both). -> Bad for poor economies, present consumption which is very low must be given up to increase capital (which would of course lead to starvation). Example: Make more machines and send everyone back to school. Result, people not producing as much but it’s a future investment of more production. * High consumption (good economy) -> low growt
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