# Econ Chapter 2 Study Notes

Topics: Economics, Marginal utility, Money Pages: 30 (1004 words) Published: February 25, 2013
Econ
101:
Micro
Economics
09-­‐16-­‐10

Chapter
2:
The
Economic
Problem

The
production
possibility
Frontier
-­‐ The
boundary
between
those
combinations
of
goods
and
services
that
can
be
produced
and
those
that
cannot
-­‐ Shows
the
between
more
of
one
good
in
terms
of
the
other
o PPF
looks
at
an
model
economy
(two
goods
are
forced
upon
while
everything
else
stays
constant)

-­‐ The
PPF
for
cola
and
pizza
limits
the
production
of
these
two
-­‐ Illustrates
scarcity
because
we
cannot
attain
points
OUTSIDE
the
frontier
E:
typical
month;
produce
4
million
pizzas
and
5million
cola
A:
all
people
who
produce
pizza
are
moved
to
producing
cola
=
15
million
cola

Production
efficiency
if
we
produce
goods
and
services
at
lowest
possible
cost.


Occurs
when
all
points
are
ON
PPF

Production
inefficiency
inside
PPF
because
resources
are
unused/misallocatedPOINT
Z

o Unused:
favorites
are
idle
or
workers
are
unemployed
o Misallocated:
assigned
for
which
they
are
not
best
match/inefficient
for

-­‐ Assumptions:
fixed
amount
of
labour,
land,
capital,

-­‐ The
PPF
is
typically
bowed-­‐out
or
linear.
It
is
not
bowed-­‐in
o This
is
because
resources
are
not
all
equally
productive
in
all
activities
o As
the
quantity
of
each
good
increases,
so
does
the
opportunity
cost

-­‐ The
more
of
either
good
we
try
to
produce,
the
less
productive
are
the
resources
we
use
to
produce
that
good
and
the
larger
is
the
opportunity
cost
of
a
unit
of
that
good
o If
skilled
pizza
makers
are
moved
from
Domino’s
to
Pepsi,
you
get
small
increase
in
quantity
of
cola
but
large
decrease
in
quantity
of
pizza

Econ
101:
Micro
Economics
09-­‐16-­‐10

*On
our
real-­‐world
PPF,
we
can
produce
more
of
any
good/service
only
if
we
produce
less
of
some
other
good/service

-­‐ Opportunity
cost
of
an
action
is
the
highest-­‐valued
alternative
forgone
-­‐ It
is
a
ratio:
decrease
in
quantity
produced
of
one
good
divided
by
increase
in
quantity
produced
of
another
o Opp.
Cost
of
can
of
cola
=
INVSERSE
opp.
Cost
of
pizza
o Along
the
PPF,