Lecture Notes 1

Lecture Notes 1 - Principles of Economics Microeconomics...

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Principles of Economics Microeconomics 24/01/10 Productive Possibilities Frontiers: A society can produce two goods, using all of its resources efficiently, in distinct ratios. A PPF illustrates all combinations of goods that a society can produce using all resources with a given state of technology A PPF is negatively sloped – illustrating scarcity – there is a limit. There is an inevitable trade-off as the production of goods cannot increase without limits. Resources are not abundant but limited. A point under the PPF illustrates inefficiency, whilst a point over the PPF is not feasible. Opportunity cost: the production of one good must be decreased in order to increase the production of another good. An opportunity cost is in terms of the other goods, the alternative choice. The opportunity cost represents what is lost by choosing a particular production action.Opportunity cost does not have to increase linearly. Incremental costs will change, as illustrated by an increasing gradient on the graph. The slope of the PPF measures the opportunity cost of the factor on the x-axis. The PPF illustrates what can be produced, the supply aspect of the supply demand relationships. PPF Graph (consumption goods by investment goods) – investment is refraining from consumption. A decision today will certainly affect the possibilities for the future. CPF – Consumption Possibility Frontier. A PPF represents a CPF if there is no trade (import/export) action occurring. Trade allows societies to go beyond their PPFs so to consume more than is produced domestically. Capital goods by consumption goods
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This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 1 - Principles of Economics Microeconomics...

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