Econ Chapter 2 Study Notes

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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
 trade-­‐off
 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
 tasks
 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
 additional
  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
 additional
 can
 of
 cola
 =
 INVSERSE
 opp.
 Cost
 of
 additional
 pizza
  o Along
 the
 PPF,
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