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Econ Chapter 2 Study Notes

By ohchanada Feb 25, 2013 1004 Words
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,
 there
 are
 only
 two
 goods
 so
 there
 is
 only
 one
 alternative
  forgone:
 some
 quantity
 of
 the
 other
 good
   Moving
 from
 point
 CD
 (more
 pizza
 but
 less
 cola)
  -­‐ The
 slope
 of
 the
 PPF
 measures
 the
 marginal
 opportunity
 cost
 of
 producing
 one
 good
  in
 terms
 of
 the
 amount
 of
 the
 other
 good
 foregone.
 
 
  Increasing
 opportunity
 cost
  -­‐ Between
 AB
 frontier
 has
 gentle
 slope
  o Increase
 in
 quantity
 of
 pizza
 costs
 small
 decrease
 in
 quantity
 of
 cola=
  opportunity
 cost
 of
 pizza
 is
 a
 small
 quantity
 of
 cola
 
 
  Marginal
 Cost
 opportunity
 cost
 of
 producing
 one
 more
 unit
 of
 a
 good
 
  Marginal
 Benefit
 benefit
 received
 from
 consuming
 one
 more
 unit
 of
 it
  -­‐ Measured
 by
 one’s
 willing
 to
 pay
 for
 an
 additional
 unit
 
  Allocative
 Efficiency
 goods/services
 are
 produced
 at
 the
 lowest
 possible
 cost
 and
 in
 the
  quantity
 that
 provide
 the
 greatest
 possible
 benefit
 MC=MB
 

 
 
 
 
 
 
 
 
 

 

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

  The
 principle
 of
 decreasing
 marginal
 benefit the
 more
 we
 have
 of
 any
 good
 or
 service,
  the
 smaller
 is
 its
 marginal
 benefit
 and
 the
 less
 we
 are
 willing
 to
 pay
 for
 an
 additional
 unit
 of
  it
 

 
  Economic
 Growth
  -­‐ -­‐ Expansion
 of
 production
 possibilities
 and
 increase
 standing
 of
 living
  Influenced
 by
 two
 factors:
  1. Technological
 change
 development
 of
 new
 goods
 and
 better
 ways
 of
  producing
 goods/services
  2. Capital
 accumulation
 growth
 of
 capital
 resources
 (including
 human
 capital)
  For
 new
 resources
 in
 technology
 and
 producing
 new
 capital=
 decreasing
 production
  of
 consumption
 goods
 and
 services
  *Economic
 growth
 is
 not
 free
  Opportunity
 cost
 of
 economic
 growth
 =
 less
 current
 consumption
 
 
 
  By
 reducing
 pizza
 production
 now,
 we
 use
  its
 resources
 for
 more
 technology
 for
  pizza
 ovens
 and
 the
 PPF
 expands
 in
 future

-­‐ -­‐ -­‐

 
 
 

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

  Gains
 of
 Trade
  Specializationproducing
 only
 one
 good
 or
 a
 few
 goods
  A
 person
 has
 a
 comparative
 advantage
 in
 an
 activity
 if
 that
 person
 can
 perform
 the
 activity
  at
 a
 lower
 opportunity
 cost
 than
 anyone
 else
  A
 person
 has
 an
 absolute
 advantage
 if
 that
 person
 is
 more
 productive
 than
 others
  Comparative
 advantage
 is
 comparing
  opportunity
 costs
 
  *One
 can
 have
 absolute
 advantage
 but
 not
 have
 comparative
 advantage
 in
 every
 activity
  o I.E.
 Bob
 is
 a
 great
 singer
 and
 artist
 
 absolute
 advantage
   But,
 compared
 to
 others,
 he
 is
 better
 at
 folk
 singing
 than
 painting
  comparative
 advantage
 is
 in
 folk
 singing
 (lower
 opp.
 cost)
 
  Absolute
 advantage
 is
 comparing
  productivities
 (production
 per
 hour)
 

  Learning-­by-­doing
 repeatedly
 producing
 in
 that
 activity
 (basis
 of
 dynamic
 comparative
  advantage)
  Dynamic
 comparative
 advantage
 person
 (or
 country)
 has
 acquired
 by
 specializing
 in
 an
  activity
 and
 becoming
 the
 lowest-­‐cost
 producer
 as
 a
 result
 of
 “learning-­‐by-­‐doing
  **When
 specializing
 you
 need
 to
 have…
  Economic
 Coordination
  Two
 competing
 economic
 coordination
 systems:
  1. Central
 economic
 planningmay
 appear
 to
 be
 bet
 system
 because
 it
 can
 express
  national
 priorities
  2. Decentralized
 coordination-­‐4
 different
 social
 institutions
  a. Firms
  b. Markets
  c. Property
 rights
  d. Money
  A:
 Firms
 hires
 factors
 of
 production
 and
 organizes
 those
 factors
 to
 produce
 and
 sell
  goods/services
 (gas
 station,
 Canadian
 Tire,
 Roots)
  o More
 efficient
 for
 firms
 to
 specialize
 and
 trade
 with
 each
 other
 in
 markets
 
 
  B:
 Marketsany
 arrangement
 where
 buyers
 and
 sellers
 get
 information
 to
 do
 business
 w/
  each
 other
 (world
 oil
 market
 network)
  o Can
 work
 only
 with
 property
 rights
 
  C:
 Property
 Rightssocial
 arrangement
 that
 governs
 ownership
 use
 and
 disposal
 of
  anything
 that
 people
 value
 

Econ
 101:
 Micro
 Economics
  09-­‐16-­‐10
 
o o o Real
 property
 land/buildings
 and
 durable
 goods
 like
 plant/equipment
  Financial
 propertystocks/bonds
 and
 money
 in
 the
 bank
  Intellectual
 propertyproduct
 of
 creator
 protected
 by
 copyrights
 and
  patents
 (books,
 music,
 computer
 software)
 

D:
 Moneycommodity
 or
 taken
 generally
 acceptable
 as
 means
 of
 payment
  Circular
 Flow
 through
 Market
  Red
 
  o Households
 use
 their
 skills
 in
  factors
 of
 production
 to
 firms
  through
 “factor
 market”
  o Firms
 give
 households
 goods
 and
  services
 through
 “good
 markets”
 
 
  Green(payments
 for
 red
 flows)
  o Household
 expenses
 for
 the
  goods/services
  o Firms
 pay
 through
 rent,
 wages,
  interest,
 profit
 to
 households
 

 
 
 

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