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Econ Notes Chapter 2

by: Whitney Davis

Econ Notes Chapter 2 Eco 060

Whitney Davis
Kutztown University of Pennsylvania

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Here's an outline of Chapter 2
Dr. Sraiheen
Class Notes
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This 4 page Class Notes was uploaded by Whitney Davis on Tuesday February 2, 2016. The Class Notes belongs to Eco 060 at Kutztown University of Pennsylvania taught by Dr. Sraiheen in Winter 2016. Since its upload, it has received 33 views.

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Date Created: 02/02/16
Chapter 2: The Economic Problem Scarcity  Choice  Trade-offs  Opportunity Cost Production Possibilities Frontier (PPF)  The boundary between those combinations of goods and services than can/cannot be produced o Focus on two goods at a time o Holds quantities of all other goods and services constant  PPF illustrates scarcity  Any points outside frontier are unattainable  Any points in/on PPF are attainable  Assumptions o Two goods being produced o Amounts of factors of production and the state of technology are constant o Production is efficient Production efficiency  Points ON PPF are efficient o Efficient – Maximum output from given amount of resources  All resources are fully employed  Points IN PPF are inefficient  If you increase amount of only one good/service, then that is inefficient Tradeoff Along the PPF  Fixed amount of labor, land, capital, and entrepreneurship  Given state of technology  Example of a tradeoff: o When doctors spend more on AIDS and cancer research, they face a tradeoff: more medical research for less of some other things  All tradeoffs involve an opportunity cost Opportunity Cost  The highest-valued alternative forgone  The opportunity cost of producing an additional pizza is the cola we must forgo (Refer to picture above)  Opportunity Cost is a ratio  The decrease in quantity produced of one good ÷ the increase in quantity produced of another good  Increasing Opportunity Cost o Cost of producing one good in terms of another good Shape of PPF  Outward-bowed shape of the PPF (concave)  Straight line PPF (linear) Using Resources Efficiently  Allocative Efficiency o When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit o Producing at the point of allocative efficiency – the point of the PPF we prefer above all other points  The PPF and Marginal Cost o Marginal Cost – the opportunity cost of producing one more unit of a good  Preferences and Marginal Benefit o Marginal Benefit  The benefit received from consuming one more unit from a good or service  The most you are willing to pay for something o Preferences  People’s likes and dislikes and the intensity of those feelings  Describe what people like o Production possibilities describe limits or constraints on what is feasible o Marginal benefit curve  Unrelated to PPF o The more we have of good/service, the smaller the marginal benefit  Principle of decreasing marginal benefit Economic Growth  The expansion of production possibilities  Increases our standard of living  The faster we make production grow, the greater the opportunity cost of economic growth  The Cost of Economic Growth o Comes from technological change and capital accumulation o Technological Change: development of new goods and of better ways of producing goods/services o Capital Accumulation: the growth of capital resources  Including human capital o If we use resources to develop new technologies and resources, we must decrease production of consumption goods and services o The more production resources, the greater the expansion of future production possibilities Economics in Action  A Nation’s Economic Growth o As production possibilities expand, consumption can increase o Both buyers AND sellers gain from specialization and trade Gains From Trade  Specialization o Producing only one good or few goods  Comparative and Absolute Advantages o Comparative – if a person performs and activity at a lower opportunity cost than anyone else  Example: One person is an outstanding pitcher, but a poor catcher  Involves comparing opportunity costs o Absolute – a person that is more productive than others  Example: John Grisham is a better lawyer and better author of fast-paced thrillers than most people  Involves comparing productivities  production per hour Economic Coordination  Two competing coordination systems 1. Central Economic Planning 2. Markets  Central Economic Planning o Works badly because economic planners don’t know people’s production possibilities and preferences o Production ends up inside PPF and wrong things are produced  Decentralized economic planning works best o Four complementary social institutions 1. Firms 2. Markets 3. Property Rights 4. Money o Firm  Economic unit that hires factors of production  Organizers of factors to produce and sell goods/services  Example: Wal-mart o Market  Any arrangement that enables buyers and sellers to get information and do business with each other  Example: Worls Oil Market  A place where people buy/sell goods (fish, meat, fruits, vegetables) o Property Rights  The social arrangements the govern the ownership, use, and disposal of anything that people value  Real Property includes land and buildings and durable goods such as plants and equipment  Financial Property includes stocks, bonds, and money in the bank  Intellectual Property is the intangible product of creative effort o Money  Any commodity or token that is generally acceptable as a means of payment  Circular Flows Through Markets o Created by trading in markets for goods/services and factors of production o Factor markets – Firms choose the quantities of factors of production to hire o Goods markets – Households choose the quantities of goods/services to buy, and firms choose the quantities to produce  Coordinating Decisions o When the price is right, buying plans and selling plans match


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