Textbook Notes (368,098)
United States (205,941)
Economics (213)
01:220:102 (140)
Chapter 2

Chapter 2 Notes

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Department
Economics
Course
01:220:102
Professor
Jack Skydel
Semester
Spring

Description
Chapter 2 Notes • Production possibilities frontier (PPF): The boundary between those combinations of goods and services that can be produced and those that cannot o To illustrate the PPF we look at a model economy in which the quantities produced of only two goods change, while the quantities produced of all the other goods and services remains the same o The PPF illustrates scarcity because the points outside the frontier are unattainable o We can produce at any point inside the PPF or on the PPF (these points are attainable) • Production efficiency: Producing goods and services at the lowest possible cost o Occurs at all points on the PPF o At points inside the PPF, production is inefficient because we are giving up more than necessary of one good to produce a given quantity of the other good o Production inside the PPF is inefficient because resources are either unused or misallocated or both o Resources are unused when they are idle but could be working o Resources are misallocated when they are assigned to tasks for which they are not the best match • Achoice along the PPF involved a tradeoff o Tradeoffs involved an opportunity cost • Opportunity cost: The highest-valued alternative forgone o It is a ratio- the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier • Allocative efficiency: When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit • Marginal cost: The opportunity cost of producing one more unit of it • Marginal benefit: The benefit received from consuming one more unit of it o Depends on one’s prefere
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