ECO365 Week 4 Lecture Notes

ECO365 Week 4 Lecture Notes - Chapter 2 I The last chapter...

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Chapter 2 I. The last chapter emphasized that an economic system must coordinate individuals’ wants and desires. A. An economic system has to solve three coordination problems: 1. What, and how much, to produce. 2. How to produce it. 3. For whom to produce it. B. A key element in recognizing that lunches are not free is the concept of opportunity cost introduced in the last chapter. II. The production possibility model: the production possibility curve shows the tradeoff among choices. It can be presented both in a table and in a graph. A. The production possibility table is a table that lists the opportunity cost of a choice by summarizing what alternative outputs you can achieve with your inputs. An output is the result of an activity. An input is what is put into a production process to achieve an output. See Figures 2-1a and b. B. A production possibility curve for an individual. 1. A production possibility curve (Chapter Objective 1) is a curve that measures the maximum combination of outputs that can be achieved from a given number of inputs. See Figure 2-1b). 2. A production possibilities curve slopes downward from left to right. It not only represents the opportunity cost concept, it also measures the opportunity cost. 3. The production possibility curve demonstrates that there is a limit to what you can achieve, given the existing institutions, resources, and technology, and that every choice made has an opportunity cost. You can get more of something only by giving up something else. C. A production possibility curve for a society: The production possibility curve is generally bowed outward since some resources are better suited for the production of some goods (see Figure 2-2). Economists call this comparative advantage – to be better suited to the production of one good than to the production of another good (Chapter Objective 2). D. Increasing marginal opportunity cost: The principle of increasing marginal opportunity cost states that in order to get more of something, one must give up ever- increasing quantities of something else (Chapter Objective 3).
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E. Efficiency. 1. In our production, we would like to have productive efficiency – achieving as much output as possible from a given amount of inputs or resources. Efficiency involves achieving a goal as cheaply as possible. Efficiency has meaning only in relation to a specified goal. See Figure 2-3a. a. Any point on the production possibilities curve represents efficiency. b. Any point within the production possibility curve represents inefficiency – getting less output from inputs which, if devoted to some other activity, would produce more output. c. Any point outside the production possibility curve represents something unattainable, given present resources and technology.
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