Chapter 2 PDF

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Chapter 2...

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Production Possibilities Frontier (PPF) is the boundary between the combination of goods and services that can be produced and those that can’t. Choosing the consumption of one good over the either, or determining the amount of production for each good. (If one good increases the other decreases) We must give up some of one good to get more of another. It’s a trade off. Production Efficiency is achieved when production of more of good doesn’t not cause decreases in production in the other. We are producing somewhere on the PPF Opportunity cost = ratio PPF bows outwards, it’s not linear The more we have of any good, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it. (Principle of decreasing marginal benefit) Allocative Efficiency is when we cannot produce more of any one good without giving up some other good that we value more highly. We are producing at the point on the PPF that we prefer above all other points. The point of allocative efficiency is the point on the PPF at which marginal benefit is equal to marginal cost This point is determined by the quantity at which the marginal benefit curve intersects with the marginal cost curve The expansion of production possibilities - an increase in the standard of living is called economic growth Two key factors influence economic growth - Technological change - Capital accumulation Technical Change is the development of new goods and of better ways of producing goods and services Capital accumulation is the growth of capital resources which includes human capital The Cost of Economic Growth

To use resources in research and development and to produce new capital, we must decrease our production of consumption of goods and services Economic growth is not without cost The opportunity cost of economic growth is less current consumption Comparative Advantage: When a person can perform the activity at a lower opportunity cost than anyone else Absolute Advantage: When a person is more productive than others Absolute Advantage compares productivity while Comparative Advantage compares opportunity cost To reap gains from trade, the choices of individuals must be coordinated...