Chapter03_H - 6E:001 Principles of Economics Spring, 2008...

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1 6E:001 Principles of Economics Spring, 2008 Chapter 3 – The Economic Problem 2 Preview { Concepts to be revisited z Scarcity and choice z Opportunity cost z Efficiency z Specialization and Comparative Advantage { First look at markets z What to produce z How to produce it z Who gets it 3 Outline { Production Possibility Frontiers, and concepts revisited z 1. Making coffee z 2. Neighbors on the Prairie z 3. Increasing Costs { What we are to learn Scarcity* Opportunity Cost* PPF Increasing Costs Efficiency* Comp. Advantage* Role of Markets Prices vs Costs (* These were among the “principles” of ch.1. The remaining concepts are new.)
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2 4 A simple production technology { Available Resources: z 12 tbsp of coffee grounds z lots of water { Espresso requires 2 tbsp / cup { Coffee requires 1 tbsp /cup { Tradeoff – the more expresso we make, the less coffee we can make 4 4 8 2 12 0 Production Possibilities 0 2 6 10 Coffee 6 5 3 1 Espresso 5 Production Possibility Frontier 6 3 4 4 2 5 0 6 12 0 10 1 8 2 Coffee Espresso 0 1 2 3 4 5 6 024681 0 1 2 Coffee Espresso 6 Efficiency, Opportunity Cost { Points below PPF are possible, but inefficient { Output along PPF is efficient { Slope of PPF is Opportunity cost z Cost of coffee is ½cupof espresso 0 1 2 3 4 5 6 0 1 2 Coffee
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This note was uploaded on 03/28/2008 for the course ECON 06E:001:AA taught by Professor Nelson during the Spring '08 term at University of Iowa.

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Chapter03_H - 6E:001 Principles of Economics Spring, 2008...

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