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Chapter 2 Notes

by: Sarah Smithson

Chapter 2 Notes 106

Sarah Smithson
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Chapter 2 Notes
Introductory Microeconomics
David Van Der Goes
Class Notes
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This 3 page Class Notes was uploaded by Sarah Smithson on Saturday January 30, 2016. The Class Notes belongs to 106 at University of New Mexico taught by David Van Der Goes in Spring 2016. Since its upload, it has received 25 views. For similar materials see Introductory Microeconomics in Economcs at University of New Mexico.


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Date Created: 01/30/16
Chapter 2 Notes Production Possibilities and Opportunity Costs • Resources are limited ◦ Result is trade-offs Production Possibilites Frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology Graphing the Production Possibilities Frontier • Two goods/services on a graph • Graph shows trade offs • All combinations either on the frontier or inside it are attainable • All combinations on the frontier are efficient ◦ All available resources are being utilized • All combinations outside the frontier are impossible given current resources/technology Increasing Marginal Opportunity Costs • PPF can be used to explore issues concerning the economy as a whole • PPF is curved outward • Increasing marginal opportunity cost ◦ The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity Economic Growth • At any given time, the total resources available to any economy are fixed • Over time, the resources available to an economy may increase • Technological change can shift the PPF outward • Outward shifts in the PPF represent economic growth ◦ The ability of an economy to increase the production of goods and services Comparative Advantage and Trade • Markets are fundamentally about trade ◦ The act of buying and selling Specialization and Gains from Trade • We use PPFs to show the benefits of trade • Trade only works if both parties are better off after the transaction Absolute Advantage v. Comparative Advantage • Absolute Advantage ◦ The ability of an individual, firm, or a country to produce more of a good or service than competitors, using the same amount of resources. ◦ Specialization Sometimes only producing one good or service is better than producing both More efficient use of resources • Comparative Advantage ◦ The ability of an individual, firm, or company to produce a good or service at a lower opportunity cost than competitors Comparative Advantage and the Gains from Trade • The basis for trade is comparative advantage, not absolute advantage The Market System • Markets answer the three fundamental questions • Product Market ◦ A market for goods or services • Factor Market ◦ A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability • Factors of Production ◦ The inputs used to make goods and services ◦ Four categories Labor Capital Natural resources Entrepreneurial ability The Circular Flow of Income • Two key groups participate in markets ◦ Households Supply labor and other factors of production in exchange for wages and other payments from firms ◦ Firms Produce goods and services using the factors of production provided by households • Simplified, so ignores government intervention, international markets, ect. The Gain from Free Markets • Free Market ◦ A market with few government restrictions on how a good or 2 service can be produced or sold or on how a factor of production can be employed • Adam Smith ◦ Scottish philosopher considered father of modern economics ◦ Wrote An Inquiry into the Nature and Causes of the Wealth of Nations ◦ Argued that restrictions reduced income of a country and its people by restricting the quantity of goods produced The Market Mechanism • Smith argued that prices would do a better job of coordinating buyers and sellers ◦ Rationality assumption The Legal Basis of a Successful Market System • Protection of Private Property ◦ Property Rights ◦ Rights individuals or firms have to the exclusive use of their property ◦ Intellectual Property Rights Trademarks, copyrights, ect. • Enforcement of Contracts and Property Rights ◦ Contracts must be upheld for the market system to work 3


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