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Ch. 3 Notes

by: Grace Heinerikson

Ch. 3 Notes EC 110

Grace Heinerikson
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About this Document

These notes are for Ch. 3 for EC 110, University of Alabama.
Dr. Tao Chen Yeh
Class Notes




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This 4 page Class Notes was uploaded by Grace Heinerikson on Monday October 3, 2016. The Class Notes belongs to EC 110 at University of Alabama - Tuscaloosa taught by Dr. Tao Chen Yeh in Fall 2016. Since its upload, it has received 78 views. For similar materials see Microeconomics in Economics at University of Alabama - Tuscaloosa.


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Date Created: 10/03/16
Ch. 3: Scarcity & Choice: The Economic Problem Vocabulary:  OpportunityCost:thevalueofthe nextbest alternativethatisgivenup becauseof thedecision.  MoneyCost:the explicitcost ofan activity.  Rationality:decisionsarerationalwhenthebenefitsexceedthe total (opportunity)costsofthatdecision.  ProductionPossibilityFrontier(PPF): a graphshowingthedifferent combinationsofvariousgoodsthata producercan turn out,given the availableresourcesandexistingtechnology.  Efficiency:the allocationofresourcesin which themaximum combinationofoutputsarecreated.  Slope:theopportunitycostofx-axisproductionintermsof forgone productionofthey-axis commodity.  PrincipleofIncreasingCosts:as the productionofagood expands,the opportunitycostofproducinganotherunitgenerallyincreases.  InputSpecialization:somegoods(inputs)are more suitedtothe productionofonegood thananother,thuscausingopportunitycostto rise.  Three CoordinationTasksofan Economy: o ProductiveEfficiency: be onthe PPF o AllocativeEfficiency:be onthe ‘right’pointonthePPF o Distribution:whogets what?  AdamSmith:fatherof moderneconomics,authorofTheWealthof Nations,theorizedthe‘invisiblehand’.  DivisionofLabor:specializationofinputsorresourcesandthena mediumor methodofexchange leadstogreater productionandmutual benefitstoall involvedparties.  Law ofComparativeAdvantage:evenwhen a producerhas higher efficiencyin the productionofbothgoods,itstillbenefitsbothpartiesto producewhat theyare at leastbetter at producingandthentoexchange goods. Main Ideas:  OpportunityCost:thetruecost of anoptioninthe economicsystem. o The valueofthe nextbest optionthatisgiven up. o Directlyrelatedto scarcity(wantsexceed needs,so trade-offs must occur). o The “real”cost,often factoringin moneycost. o Some moneycosts are notincludedinthe OC becausethey wouldhavebeenincurredin eitheroption. o Often becomes greater as youmove alonga PPF due to specializationofresources.  Rationality:benefitsmustexceedthe costs. o AnypointonthePPF is a rationaldecision.  Efficiency:proper useof allavailableresources(nowaste). o Inefficienciesare mostlycaused bymisuseofresources (e.g. unemployment). o AnypointonthePPF is efficient. o Pointsbeloware inefficient,whilepointsabovearenotyet attainablegiventhe inputs.  ProductionPossibilityFrontier(PPF): 2 o The possiblecombinationsofgoodsandservices thatcan be producedgiven efficientuse ofinputs. o Resources=inputs=factorsofproduction  Land,labor,capital(machines,technology,etc.).  PrincipleofIncreasingCosts: o Resultsfrom inputspecialization(someresourcesare better suitedtothe productionofonegood ratherthananother). o OC becomes greater as you movealonga PPF, becauseyou switch specializedinputsawayfromwhat theyare bestat. o Slopeof thePPF tellstheopportunitycostofincreasingunitsof one productinterms ofthe decreasingunitsofthe other product. o The negativeslopeofa PPF is reflectiveof scarcity(onegood must be given upto make another).  GrowthFactors ofthe PPF: o Whenresources for one productincrease,thatpoint shiftsthe correspondingsideoutwards. o Consumptiongoods:goodsthatare usedup bytheconsumer (e.g. food). o Capitalgoods:goodsthatare usedto make othergoods (e.g. ovens). o Capitalgoodsmeaneconomicgrowth,which shiftsthe PPF outwards.  DivisionofLabor: o Separatingtasksandthenexchangingbenefitsboth partiesand increasesefficiency. o Thisandspecializationaremosteffective followingthelawof comparativeadvantage. 3  Each partydoes whatit is betterat. 4


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