Chapter 02_The economic problem

Chapter 02_The economic problem - THE ECONOMIC PROBLEM...

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THE ECONOMIC PROBLEM 2 CHAPTER
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Production Possibilities Concept: Production Possibilities Frontier (PPF) Assume given resources, technology, etc. We look at a model economy in which everything remains the same ( ceteris paribus ) except the two hypothetical goods we‘re considering. PPF is the boundary between those combinations of goods that can be produced and those that cannot.
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PPF and Opportunity Cost Figure shows the PPF for ―guns‖ and ―butter‖ - which stand for any pair of goods and services
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PPF Opportunity Cost
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PPF Opportunity Cost Production efficiency - if we cannot produce more of one good without producing less of the other good. Points on the PPF are efficient.
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PPF and Opportunity Cost Points A-F are efficient. Z is inefficient. At Z , resources are unemployed or misallocated. Tradeoff along PPF
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PPF and Opportunity Cost Opportunity Cost Move from point C to D: the opportunity cost of the increase in butter is the decrease in guns.
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PPF and Opportunity Cost Move from C to D: Increases butter by 1 ton Guns decreases from 12 to 9 The OPPORTUNITY COST of 1 ton of butter is 3 units of guns OR, 1 ton of butter costs 3 units of guns. Marginal Cost
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PPF and Opportunity Cost Move from D to C: g uns increases by 3 units; butter decreases by 1 ton. Opportunity cost of 3 units of guns is 1 ton of butter. One unit of guns costs 1/3 of a ton of butter. NOTE: Opportunity cost of guns is the inverse of the opportunity cost of butter.
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PPF and Opportunity Cost Resources are not equally productive in all activities: the PPF bows outward as the production of each good increases, so does its opportunity cost
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Using Resources Efficiently Which combination along the PPF should society
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This note was uploaded on 10/10/2010 for the course ECON 2100 B taught by Professor Dr.vivekghosal during the Fall '09 term at Georgia Institute of Technology.

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Chapter 02_The economic problem - THE ECONOMIC PROBLEM...

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