Chapter 2

Chapter 2 - Chapter 2: Trade-offs, Comparative Advantage,...

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Chapter 2: Trade-offs, Comparative Advantage, and the Market System Scarcity requires trade-offs Scarcity- a situation in which unlimited wants exceed the limited resources available to fulfill those wants Scarcity exists because we have unlimited wants but only limited resources available to fulfill those wants Time is a scarcity Trade involves the decisions of millions of households and firms o People can raise their standard of living Production Possibilities Frontiers and Opportunity Costs Production possibilities frontier (PPF)- a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology Graphing the Production Possibilities Frontier Points inside the frontier are attainable with the resources available Combinations on the frontier are efficient because all available resources are being fully utilized, and the fewest possible resources are being used to produce a given amount of output Combinations inside the frontier are inefficient because maximum output is not being obtained from the available resources Points beyond the PPF are unattainable , given the firm’s current resources Opportunity cost- the highest valued alternative that must be given up to engage in an activity Increasing Marginal Opportunity Costs As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production This occurs because some workers, machines, and other resources are better suited to one use than to another The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity Economic Growth At any given time, the total resources available to any economy are fixed Over time, the resources available to an economy may increase Technological change makes it possible to produce more goods with the same number of workers and the same amount of machinery, which also shifts the production possibilities frontier outward Economic growth- the ability of the economy to increase the production of goods and services
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This note was uploaded on 02/21/2012 for the course EC 101 taught by Professor Idson during the Fall '08 term at BU.

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Chapter 2 - Chapter 2: Trade-offs, Comparative Advantage,...

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