HOSept22 - Economics 201 Witte Thursday No TA section this...

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Economics 201, Witte, Thursday, September 22, 2005 No TA section this week, but we will announce how to sign up for them soon. Opportunity Costs and Production Possibilities Frontiers http://www.faculty.econ.northwestern.edu/faculty/witte/B01/handouts/bpareto.html I. Opportunity Costs, Marginal Analysis, and Double Majors II. What does efficient resource allocation mean? a. Vilfredo Pareto (1848-1923) came up with a very uncontroversial definition. i. Pareto Improvement: A change in resource use so that we can get more of something without giving up any of the other things we enjoy. ii. Pareto Efficiency: There is no way to change resource use so that we get more of one good and just as much of everything else. No Pareto improvements are possible. iii. (24, 53) is a Pareto improvement over (21, 53), and (24, 51) and (20, 52). iv. (24, 53) is Pareto non-comparable to (25, 3). A Pareto ranking isn’t possible here. III. Production Possibilities Frontiers (PPF) – Given fixed resources and technology, what are the Pareto efficient combinations of things we can produce? a. Guns and Butter – Traditional example b. Military goods, consumer goods, investment goods, leisure, etc. – 3 or more dimensions possible, but very hard to draw more than two. c. How curve shifts i. Change in total resources ii. Change in resources for producing one good iii. Change in overall useful knowledge, technology, productivity iv. Change in knowledge, technology, or productivity useful for producing one good d. Example: Consumption (and defense) spending versus investment spending. i. More investment spending creates more productive capital in the future. ii. More future capital means more factories and jobs, and productive capability. iii. More investment (thus less consumption) now means a bigger PPF in the future. IV. Why do PPFs bow outward? a. Differentiated relative abilities of inputs. What if we had the choice of making two goods that are essentially identical? The PPF would be a straight line. b. “Comparative Advantage” – it’s not about a resource being the best at some task, it’s about the resource having the lowest opportunity cost in terms of what else it could be used for that would be giving up.
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