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Transcript
The Economic Problem: Production Possibilities Frontier (PPF) – 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, holding all others at a constant We look at a model economy in which everything remains the same (ceteris paribus) except the two goods we’re considering Problem: limited resources. How should they be allocated across the various production of G&S? What is the best combination? Any point on or inside the PPF is attainable, points outside the frontier are unattainable Production efficiency: is achieved if we cannot produce more of one good without producing less of some other good Points on the frontier are efficient, points inside, like D, are inefficient (See appendix to chapter 1 for graphing) Every choice along the PPF involves a tradeoff The opportunity cost of a gun is the butter forgone The OC of a gun is the inverse of the OC of butter Because resources are not equally productive in all activities, the PPF bows outward = concave o As the quantity produced of each good increases, so does its OC To determine which of the alternative efficient quantities to produce, we compare costs and benefits o The PPF determines OC o The MC of a GorS is the OC of producing one more unit of it o The OC of producing one more unit of butter is the MC of a gun The maringal cost line is determined by creating a column graph from the dots on the PPF and drawing a line through them The MC line passes through the centre of each bar Preferences are a description of a person’s likes and dislikes To describe rpeferences, economists use the concepts of MB and the MB curve The MB of a GorS is the benefit received from consuming one more unit of it o Measured by the amount a person is willing to pay for an additional unit of a GorS General rule – the more there is of a good, the smaller the marginal benefit and the less one is willing to pay for an additional unit of it o = the principle of decreasing marginal benefit The marginal benefit curve shows the relationship between the MB and the quantity of the good consumed o The MB curve (line) slopes downward, reflecting the principle of decreasing MB Allocative Efficiency: when we cannot produce more of any one good without giving up some other good that we value more highly o Producing at the point on the PPF that we prefer above all other points Production Efficiency: when we cannot produce more of any one good without giving up some other good o Producing at a point on the PPF The point of allocative efficiency is the point on the PPF at which MB = MC o Not $ but guns per unit of butter This point is determined by the quantity at which the MB curve intersects the MC curve Economic Growth: The expansion of production possibilities – an increase in the material standard of living – is called economic growth. Influenced by: o Technological change – the development of new goods and better ways of producing G&S o Capital accumulation – the growth of capital resources, includes human capital The cost of economic growth 0 to use resources in research and development, we must decrease our production of consumption G&S The OC of EG is less current consumption By using some resources to produce capital goods, the PPF shifts outward in the future To graph OC of EG, compare capital input purchased with output Capital accumulation shifts the PPF outwards