Macroeconomics 111 - Chapter 2

Macroeconomics 111 - Chapter 2 - 1-23 - CHAPTER 2: Choice,...

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Unformatted text preview: 1-23 - CHAPTER 2: Choice, Opportunity Costs, and Specialization Opportunity Cost the value of the highest valued alternative that must be forgone when a choice is made. It is the evaluation of trade-off. Marginal Benefits and Costs the benefits and opportunity costs associated with one additional unit of the good Economic Decision Making Decision-making is done at the margin -Decision-makers evaluate a fixed array of alternatives -Decision-makers compare the marginal costs to marginal benefits to determine the best alternative Growth -The PPC (Production Possibilities Curve) moves outward (growth occurs) as the result of: -Increase in resources -Larger labor force -Change in labor force participation -Change in labor-leisure decisions -Improved technology (innovation) -Expansion of capital stock -An improvement in the rules (laws, institutions, and policies) of the economy -The shape of the PPC illustrates the relative cost of moving productive resources from one activity to another -The marginal opportunity cost is the amount of one good or service that must be given up to obtain one additional unit of another good or service Specialization -Economic agents (individuals, firms, nations) will be better off if they choose to produce those things for which they have the lowest opportunity cost, and trade for those with higher costs -We say that the agent specializes in a specific activity because the agent enjoys a comparative advantage -Agents do this because such choices involve giving up the least amount of other things Comparative Advantage the ability to produce a good or service at a lower opportunity cost that someone else Law of Comparative Advantage -Proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer Exchange creates value ...
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This note was uploaded on 04/07/2008 for the course ECON 111 taught by Professor H during the Spring '07 term at UConn.

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