Chapter 2- What is the Economic Problem

Satisfactory Essays
Chapter 2 Economics Problem

Production Possibility Frontier (PPF)
-boundary between those combination you chose to produce
- there is a limited about of production capabilities
-curve/ boundary for production possibility
- the points inside curve are attainable
-all points outside ppf are unattainable

Production Efficiency
-using resources to maximum capacity
-efficiency means that if you increase production of pizza means you must give up cola (only way—no extra resources to use)
** every choice involves a tradeoff
** we must give up to make something new

Increasing opportunity cost (concave curve) cost increases this is because of specialization of factors of production milk vs. computer example because you gradually have to give up computer specialists after giving up farmers opportunity cost of pizza is cola forgone
-BECAUSE RESOUCES ARE NOT EQUALLY PRODUCTIVE IN ALL ACTIVITIES

Marginal Analysis

Using Resources Efficiently

Marginal cost- of a good or service is the opportunity cost of producing one more unit of it
**the opportunity cost of producing one more pizza is the marginal cost of a pizza

Preferences and Marginal Benefit

Preferences are a description of a person’s likes and dislikes (economists use concepts of marginal benefit and marginal benefit curve)

Marginal Benefit of a good or services is the benefit received from consuming one more unit of it willingness to pay
** we measure marginal benefit by the amount a person is willing to pay for an additional unit of a good or service

The more we consume the less the level of satisfaction for each additional unit
Diminishing marginal benefit

Allocative Efficiency

-the point of allocative efficiency is the point on the PPF at which marginal benefit equals marginal cost ** this is the efficient quantity of pizzas
**marginal meaning for each additional pizza

***demonstrates best possible point on PPF

Economic Growth

Economic

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