Sess2-PPF and gains from trade-Ch02 - CHAPTER The Economic...

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The Economic Problem CHAPTER 2
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Business Microeconomics Instructor: Gulnara Moldasheva 2 After studying this chapter you will be able to Define the production possibilities frontier and calculate opportunity cost Distinguish between production possibilities and preferences and describe an efficient allocation of resources Explain how current production choices expand future production possibilities Explain how specialization and trade expand our production possibilities Describe the economic institutions that coordinate decisions
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Good, Better, Best! For many people, life is good and getting better. But we all face costs and must choose what we think is best for us. This chapter sharpens the concepts of scarcity and opportunity cost. It introduces the idea of economic efficiency. It also explains how we can expand production by accumulating capital and by specializing and trading with each other.
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The Economic Problem Scarcity creates the need to make choices. Economic choices can be evaluated in terms of their efficiency. We can expand possible choices through capital accumulation and specialization and trade.
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Production Possibilities and Opportunity Cost The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF , we focus on two goods at a time and hold the quantities of all other goods and services constant. That is, we look at a model economy in which everything remains the same ( ceteris paribus ) except the two goods we’re considering. 5
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Activity 1: Scarcity, Opportunity Cost and Production Possibilities Curves A. Constant Opportunity Cost 1. If this economy is presently producing 12 units of Good B and 0 units of Good A: a. The OC of increasing production of Good A from 0 unit to 1 is the loss of 2 units of Good B. b. The OC of increasing production of Good A from 1 unit to 2 is the loss of 2 units of Good B. c. The OC of increasing production of Good A from 2 unit to 3 is the loss of 2 units of Good B. 6 2 Good A 6 5 4 3 2 1 0 4 6 8 10 12 G o o d B Production Possibilities Curve 1
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Activity 1: Scarcity, Opportunity Cost and Production Possibilities Curves B. Increasing Opportunity Cost 1. If this economy is presently producing 12 units of Good B and 0 units of Good A: a. The OC of increasing production of Good A from 0 unit to 1 is the loss of 2 units of Good B. b. The OC of increasing production of Good A from 1 unit to 2 is the loss of 4 units of Good B. c. The OC of increasing production of Good A from 2 unit to 3 is the loss of 6 units of Good B. 7 2 Good A 3 2 1 0 4 6 8 10 12 G o o d B Production Possibilities Curve 1
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Activity 1: Scarcity, Opportunity Cost and Production Possibilities Curves C. Zero Opportunity Cost 1. If this economy is presently producing 12 units of Good B and 0 units of Good A: a. The OC of increasing production of Good A from 0 unit to 1 is the loss of 0 units of Good B.
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