LECTURE_2 - LECTURE 2 THE ECONOMIC PROBLEM The Economic...

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LECTURE 2 THE ECONOMIC PROBLEM
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The Economic Problem Scarcity creates the need to make choices Economic choices can be evaluated in terms of their efficiency Expand possible choices through capital accumulation and specialization in trade
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Production Possibilities Frontiers The production possibilities frontier (PPF) is a graph that shows the combinations of output that the economy can possible produce and cannot produce given available productive resources and the available production technology Assuming an economy with: 2 goods: books and movies Holding quantities of all othe r goods and services contract ( ceteris paribus )
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Production Possibilities Frontiers Books Movie s A 0 600 B 200 500 C 400 300 D 600 0
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Production Possibilities Frontiers Production points beyond the PPF are not attainable . Production points on and within the PPF are attainable . But production points within the PPF are inefficient.
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Production Possibilities Frontiers The concept of PPF illustrates how scarcity creates the need to make choices. Furthermore, it illustrates: Efficiency Tradeoffs Opportunity cost Economic growth
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Production Efficiency Production is efficient only on the frontier Production efficiency can be achieved only if we cannot produce more of one good without giving up production of some other good. Why is that the area inside the PPF are attainable but not efficient? Resources are misused Resources are misallocated
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Books Movie s A 0 600 B 200 500 C 400 300 D 600 0
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Tradeoff Along the PPF At any given point in time, we have a fixed amount of factors of production. Moving along the PPF, there is always a tradeoff involved in diverting resources from the production of one thing to another. i.e. we gain one thing at the opportunity cost of losing something else.
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Books Movie s A 0 600 B 200 500 C 400 300 D 600 0
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Opportunity Cost The opportunity cost of a choice is the highest valued alternative forgone. Opportunity cost = (a decrease in the quantity produced of one good) ÷ (an increase in the quantity produced of another good)
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Books Movie s A 0 600 B 200 500 C 400 300 D 600 0
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Increasing Opportunity Cost The “bowed - out” shape of the PPF reflects the principle of increasing opportunity cost. Not all resources are the same
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This note was uploaded on 10/13/2011 for the course ECON 101 taught by Professor Vanderwaal during the Spring '08 term at Waterloo.

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LECTURE_2 - LECTURE 2 THE ECONOMIC PROBLEM The Economic...

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