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Ch02 - THE ECONOMIC PROBLEM CHAPTER 2 Objectives After...

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THE ECONOMIC PROBLEM 2 CHAPTER
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Objectives After studying this chapter, you will be able to: Define the production possibilities frontier and calculate opportunity cost Distinguish between production possibilities and preferences and describe an efficient allocation of resources Explain how current production choices expand future production possibilities Explain how specialization and trade expand our production possibilities Explain why property rights and markets have evolved
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Good, Better, Best! For many people, life is good and getting better. But we all face costs and must choose what we think is best for us. This chapter sharpens the concepts of scarcity and opportunity cost. It introduces the idea of economic efficiency. It also explains how we can expand production by accumulating capital and specializing and trading with each other.
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Production Possibilities and Opportunity Cost The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF , we focus on two goods at a time and hold the quantities of all other goods and services constant. That is, we look at a model economy in which everything remains the same ( ceteris paribus ) except the two goods we’re considering.
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Production Possibilities and Opportunity Cost Production Possibilities Frontier Figure 2.1 shows the PPF for “guns” and “butter,” which stand for any pair of goods and services.
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Production Possibilities and Opportunity Cost Points inside and on the frontier, such as points A , B , C , D , E , F , and Z are attainable. Points outside the frontier are unattainable.
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Production Possibilities and Opportunity Cost Production Efficiency We achieve production efficiency if we cannot produce more of one good without producing less of some other good. Points on the frontier are efficient.
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Production Possibilities and Opportunity Cost Any point inside the frontier, such as point Z , is inefficient. At such a point it is possible to produce more of one good without producing less of the other good. At Z , resources are either unemployed or misallocated.
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Production Possibilities and Opportunity Cost Tradeoff Along the PPF Every choice along the PPF involves a tradeoff. On this PPF, we must give up some guns to get more butter or give up some butter to get more guns.
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Production Possibilities and Opportunity Cost Opportunity Cost The PPF makes the concept of opportunity cost precise. If we move along the PPF from C to D the opportunity cost of the increase in butter is the decrease in guns.
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Production Possibilities and Opportunity Cost A move from C to D increases butter production by 1 ton. Gun production decreases from 12 units to 9 units, a decrease of 3 units.
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