T h e B i g P i c t u r e Where we have been: Chapter 1 introduced the economic reality that wants exceed the resources available to satisfy them— we face scarcity. Chapter 2 reinforces these central themes by laying out the core economic model, the Production Possibilities Frontier, or PPF , and uses it to illustrate the concepts of tradeoff and opportunity cost. Chapter 2 further details the concepts of marginal cost and marginal benefit, presenting a first look at the concept of efficiency. It then concludes with an explanation of the source of the gains from specialization and exchange and the roles of firms and markets in achieving those gains. Where we are going: The key concept of opportunity cost and the widespread tendency for the opportunity cost of a good to increase as the quantity produced of that good increases returns in Chapter 3 when we explain the supply curve and in Chapters 11 and 12 when we study a firm’s costs and cost curves. Preferences return and are treated more rigorously when we explain marginal utility theory in Chapter 8 and indifference curves in Chapter 9. Efficiency returns in Chapter 5 when we study the efficiency of markets and first preview the impediments to efficiency. The gains from trade are explored more completely in the context of international trade in Chapter 7 in Microeconomics. Finally, the role of markets and prices in allocating resources and coordinating activity is an ongoing theme throughout most of the rest of the text. The next task, in Chapter 3, is to develop the central demand and supply model. W h a t ’s N e w t o t h e S e v e n t h E d i t i o n Chapter 2 has been slightly rewritten. The Reading Between the Lines is new. It uses the PPF to explore how the policies promoting ethanol increased the opportunity cost of food and ethanol. It also shows how droughts in the rest of the world further impacted the opportunity cost of both food and ethanol. 2 THE ECONOMIC PROBLEM C h a p t e r
1 0 C H A P T E R 2 L e c t u r e N o t e s The Economic Problem • Scarcity creates the need to make choices. • Economic choices can be evaluated in terms of their efficiency. • We can expand possible choices through capital accumulation and specialization and trade. I. Production Possibilities Frontier • The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. • Consider the production choices for two goods: books and movies. The table with the data for the PPF is below and a figure showing the PPF is to the right. Books Movies A 0 600 B 200 500 C 400 300 D 600 0 • Production points beyond the PPF are not attainable; production points on and within the PPF are attainable, but production points within the PPF , such as point Z , are inefficient.
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