Production Productivity Frontier (PPF): Model that shows the trade offs facing an economy that produces two goods. Shows max quantity of one good that’s produced for any given quantity produced of the other. If it lies behind the line its feasible but not efficient. Above line not feasible. On line feasible/efficient in production. Models efficiency, opportunity cost, and economic growth. Economic cost= accounting cost + opportunity cost. Opportunity cost: real cost of an item: what you must give up in order to get it. Slope of PPF shows the Opportunity cost of producing opportunity cost on PPF is decrease in one over increase in the other x/y.=rise/run. Increasing opportunity cost : when opportunity costs are ^ rather than constant, the PPF is a bowed out curve rather than a straight line. Economic growth : on PPF growing ability of the economy to produce goods and services. Shift of curve to right. 2 reasons ^ in factors of production, resources used to produce goods and services. 2 Is progress in technology. Efficient economy = no missed opportunities- no way to produce more of one good without producing less of other goods. Comparative advantage CA : when producing a good/service if its opportunity cost of producing the good/service is lower than other countries. Produce things you’re especially good at producing and buy from other countries the things you aren’t good at producing. Absolute advantage AA : when producing a good/service if the country can produce more output per worker than other countries AA doesn’t= CA. Marginal decision: decision made at the margin of an activity about whether to do a bit more or a bit less of an activity. Marginal decision : study of the marginal decision. Specialization : the situation in which each person specializes in the task that he or she is good at performing. Benefits of trade: by dividing tasks (specialization) and trading, two people can each get more of what they want than they could get by being self sufficient. Leading to specialization in which a person who specializes has a greater output of something compared to a person who tries to do multiple tasks. A market economy allows people to achieve gains from trade. Consumption/ Production levels before trade vs. after trade: 3. Supply and Demand- Demand Curves: shows the quantity demanded at various prices. Law of demand : a higher price for a good or service leads people to demand smaller quantity. Downward sloping demand curve : as price decreases the quantity demanded increases. Changes in price : decrease in price increase demand (vice versa). Movements along the demand curve : change in quantity demanded. Demand curve shifters : shifters= changes in price of related goods/services, income, tastes, expectation, # of consumers Shift left= decrease in demand. Shift right= increase in demand. Substitutes : if a decrease in the price of one good leads to a decrease in demand for the other (vice versa). Complements: if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa): + in price of gas will – demand for SUV’s. Inferior goods and normal goods
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