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Chapter 2

Chapter 2 The Economic Problem Outline Notes

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Erin Fairweather

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ProductionPossibilities and OpportunityCost Sunday,February17, 2013 8:18 PM • ProductionPossibilitiesFrontier (PPF)-boundarybetween those combinations of goods and services thatcan be produced and those that cannot • ProductionEfficiency-productionof goods and services atthe lowest possiblecost • Tradeoffs • Cancalculate opportunity costs sincethere areonly two goods,and one alternative is forgone UsingResources Efficiently Sunday,February17, 2013 9:06PM • Allocative Efficiency- goods andservices are produced at the lowest possible costand in the quantities that provide the greatestpossible benefit • Marginal Cost- opportunity costof producing one more unit of it ○ Calculate from the slope of the PPF • Preferences and Marginal Benefit ○ Marginal Benefit- benefitreceivedfrom consuming one more unit of it  Depends on people's preferences- people's likes and dislikes andthe intensity of those feelings ○ Marginal Benefit Curve- shows the relationship between the marginal benefit from a good and the quantity consumed of that good  Measure marginal benefit from a good or service by the most that people are willing to payfor an additional unit of it  Principle of DecreasingMarginal Benefit- the more we have of anygood or service, the smalleris its marginal benefit and the less we are willing topay for anadditional un
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