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Content-based study guide

by: Esther Park

Content-based study guide Econ 001

Marketplace > University of Pennsylvania > Economcs > Econ 001 > Content based study guide
Esther Park
GPA 3.7
Dr. Rebecca Stein

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About this Document

This is one of a group of study guides that is content-based rather than book-based, meaning that they are grouped and organized based on similar/generally-taught-together concepts and topics rathe...
Dr. Rebecca Stein
Study Guide
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This 6 page Study Guide was uploaded by Esther Park on Monday August 24, 2015. The Study Guide belongs to Econ 001 at University of Pennsylvania taught by Dr. Rebecca Stein in Summer 2015. Since its upload, it has received 39 views. For similar materials see INTRODUCTION TO MICROECONOMICS in Economcs at University of Pennsylvania.


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Date Created: 08/24/15
PPF OC Trade The PPF The PPF is the boundary between those combinations of goods and services that can be produced and those that cannot Graphs depict a model economy that producesconsumes only 2 goods one on each axis PPF illustrates scarcity because the points outside the frontier are unattainable while the points on the inside are attainable but inef cient resources wasted or misallocated There is a tradeoff along the PPF at any given time there is a xed amount of labor land capital and entrepreneurship and a given current state of technology PPF calla 7 lg B L U n attain able a ainablle but inefficierit Attainatil 3nd efficient p la a Production ef ciency 0 We achieve production ef ciency if we produce goods and services at the lowest possible cost all points on PPF Production inside PPF is inef cient because we are giving up more than necessary of one good to produce a given quantity of the other good see for yourself resources also go unused or misallocated or both 0 Unused when they are idle but could be working 0 Misallocated when they are used to do things for which they are not best suited Opportunity cost 0 The opportunity cost of an action is the highestvalued ALTERNATIVE foregone NEXTBEST CHOICE not all the choices 0 The PPF allows us to calculate OC when moving from point C to point E etc 0 0C is a ratio so the DC of producing an additional can of cola is equal to the RECIPROCAL of the DC of producing an additional pizza instead 0 DC of producing xaxis good in this case pizza increases steeper graph in terms of yaxis good the more of it you produce outwardbowed shape of graph You always trade with the world If the 0C is lower than both of theirs then they will both sell If it is between one will sell and one will buy If it is higher then they will both buy Steeper graph means higher DC of xaxis good Ef cient resource use 0 Q Every point on the PPF is productively ef cient but which one is the best 0 A the point on the PPF at which goods and services are produced in the quantities that provide the greatest possible bene t 0 When goods and services are produced at the lowest possible cost AND in the quantities that provide the greatest possible bene t allocative ef ciency 0 So in order to be allocatively ef cient you must have productive ef ciency too it is a part of it prerequisite PPF and marginal cost MC 0 MC the opportunity cost of producing one more unit of a good 0 F PPF gets steeper as quantity of pizzas made increases so MC also increases CCJIlEll DC Izill39ib pin a ihereasithC let pizza in terms at eellafwith respect te eella as sheWh by bigger and bigger bases CDIlEll 747 quot ml the size at these bases is the same as the size at the bases in the graph abeue pin a 0 Preferences and marginal bene t MB 0 The MB from a good or service is the bene t received from consuming one more unity of it subjective based on people s opinions and preferences their likes and dislikes and the intensity of those feelings Marginal bene t and preferences stand in sharp contrast to marginal cost and production possibilities preferences are what people like and want and production possibilities are what is feasible and describe the limitations of production of something The marginal bene t curve is used to illustrate preferences the MB curve is NOT related to the PPF and cannot be derived from it unlike the MC curve The more you have of something the less willing you are to pay for it The most you are willing to pay for something is its marginal bene t since you aren t willing to pay more for a good than what that good is worth to youwe measure the MB of a good by the most people are willing to pay for AN ADDITIONAL unit o Principle of decreasing marginal bene t the basic reason why MB decreases is that we like variety 12 consecutive cups of lemonade won t taste as good as the rst 2 did 0 The MB measured by what you are willing to pay for cells something is the quantity of other goodsservices you are willing to forego like OC Marginal benefit euwe Deere ssi ng mergi nsl beneliilrern a pizza es quantity elf pizza censurned gees up D M pi zz e Allocative ef ciency 0 0 At any point on the PPF we can t make more of one good without giving up some other good tradeoff principle At the BEST optimal like Nash equilibrium point on the PPF we cannot produce more of one good without giving up some other good that provides greater bene t stuck in the best place gt here we are producing at the point of allocative ef ciency the point on the PPF that we prefer above all the other points BEST point MG muet ME CGI EIJ pizza eeet elf eeeh pizza 1m Mime pizza MIG in terme elf eeleiel MC 39 39 and MB elf each pizza 5 39 in terme elf eeleie MG h ME marginal benetit lier PIZZA enly I tee many pizzee I I MB pi zz as Economic growth Economic growth is the expansion of production possibilities Economic growth comes from tech change and capital accumulation human capital included Economic growth shifts PPF out on the axis the good for which the technology has improved If a nation devotes all its resources to production and none to advancing tech or accumulating capital then its production possibilities will be the same in the future gt The decrease in today s consumption is the opportunity cost of tomorrow s increase in consumption Do textbook problemsother practice Specialization Comparative advantage had by a person who can produce a good at a lower OC than another person Absolute advantage had by a person who is the most productive can produce the most 0 Absolute advantage production per hour comparing productivities while comparative advantage comparing opportunity costs


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