EconomicProblem

EconomicProblem - Chapter2 The Economic Problem Click to...

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Click to edit Master subtitle style 11 Chapter 2 The Economic Problem
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Course Outline {93B6C7DD-B656-4597-8DAF-0C35C7E5FCD7} Microeconomics troduction is Economics? Markets Work nd and supply tional Topics holds’ Choice Elasticity ncy and Equity t Actions in Markets s and Markets y and Demand references, and Choices onomic Problem put and Costs ct Competition onopoly istic Competition Oligopoly 22
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33 Lecture Outline I. What are within our (my) reach? q Understanding our choices and the cost of each option II. What is best for us (me)? q Understanding our (my) preferences III. What is our (my) future? q Dynamic optimization using I and II IV. Together, can we make it better and how? q Specialization and free markets
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Topic Intended Learning Outcomes 2.1 Define the production possibilities frontier and calculate opportunity cost. 2.2 Distinguish between production possibilities and preferences, distinguish between production efficiency and allocative efficiency. 2.3 Describe an efficient allocation of resources. 2.4 Explain how current production choices expand future production possibilities. 2.5 Define and Distinguish relative and absolute comparative advantages, explain how specialization and trade expand our production possibilities. 44
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55 I. What are within our reach? n Production Possibilities q The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. q To illustrate the PPF , we focus on two goods at a time and hold the quantities of all other goods and services constant. q 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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66 I. What are within our reach? Production Possibilities Frontier Figure 2.1 shows the PPF for “CDs” and “Pizzas,” which stand for any pair of goods and services.
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77 I. 1 Production Possibility Frontier q Points inside and on the frontier, such as points A , B , C , D , E , F , and Z are attainable. q Points outside the frontier are unattainable.
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88 I. 1 Production Possibility Frontier n Production Efficiency q We achieve production efficiency if we cannot produce more of one good without producing less of some other good. q Points on the frontier are efficient.
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99 I.2 Opportunity Cost n Tradeoff Along the PPF q Every choice along the PPF involves a tradeoff. q On this PPF, we must give up some CDs to get more Pizzas or give up some Pizzas to get more CDs.
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1010 I.2 Opportunity Cost n Opportunity cost of an action is the best (highest valued) alternative forgone. n On the production possibility frontier, the opportunity cost of producing more of one product is the output of the other good that must be foregone.
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I.2  Opportunity Cost   n Opportunity Cost q The PPF makes the concept of opportunity cost precise. q
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This note was uploaded on 06/16/2011 for the course ECON 110 taught by Professor Tan during the Spring '07 term at HKUST.

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EconomicProblem - Chapter2 The Economic Problem Click to...

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