ch03slecture - The Economic Problem CHAPTER 3 CHAPTER...

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The Economic Problem CHAPTER 3
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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Use the production possibilities frontier to illustrate the economic problem. 1 Calculate opportunity cost. Define efficiency and describe an efficient use of resources. Explain what makes production possibilities expand. 2 3 4 Explain how people gain from specialization and trade. 5
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3.1 PRODUCTION POSSIBILITIES Production Possibilities Frontier Production possibilities frontier The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.
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Figure 3.1 shows the PPF for bottled water and CDs. Each point on the graph represents a column of the table. The line through the points is the PPF . 3.1 PRODUCTION POSSIBILITIES
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3.1 PRODUCTION POSSIBILITIES The PPF puts three features of production possibilities in sharp focus: Attainable and unattainable combinations Efficient and inefficient production Tradeoffs and free lunches
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3.1 PRODUCTION POSSIBILITIES Attainable and Unattainable Combinations Because the PPF shows the limits to production, it separates attainable combinations from unattainable ones. Figure 3.2 on the next slide illustrates the attainable and unattainable combinations.
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The PPF separates attainable combinations from unattainable combinations. Points outside the PPF such as point G are unattainable. We can produce at any point inside the PPF or on the frontier. 3.1 PRODUCTION POSSIBILITIES
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3.1 PRODUCTION POSSIBILITIES Efficient and Inefficient Production Production efficiency A situation in which we cannot produce more of one good or service without producing less of something else. Figure 3.3 on the next slide illustrates the distinction between efficient and inefficient production.
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1. When production is on the PPF , such as at point E or D , production is efficient. 2. If production were inside the PPF , such as at point H, more could be produced of both goods without forgoing either good. Production is inefficient. 3.1 PRODUCTION POSSIBILITIES
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3.1 PRODUCTION POSSIBILITIES Tradeoffs and Free Lunches Tradeoff An exchange—giving up one thing to get something else. Free lunch A gift—getting something without giving up something else. Figure 3.3 on the next slide illustrates the distinction between a tradeoff and a free lunch.
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When production is on the PPF , we face a tradeoff. There’s no free lunch. 4. If production were inside the PPF , there would be a free lunch. Moving from point H to point D does not involve a tradeoff. 3.1 PRODUCTION POSSIBILITIES
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This note was uploaded on 04/10/2008 for the course SOC 201 taught by Professor Ollenberger during the Spring '07 term at Cal Poly Pomona.

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ch03slecture - The Economic Problem CHAPTER 3 CHAPTER...

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