Econ 402 Chapter 2

PPC/production efficiency, opportunity cost

PPF (production possibility frontier)

\-boundary between the combination of g/s that can be produced and those that cannot

\-production of one g/s limits the production of another

\-illustrates scarcity b/c points outside of the curve are unattainable

\-limits/constraints on what is possible

Production efficiency

\-g/s produced at lowest possible cost

\-all points **on PPF curve** (inside curve is inefficient b/c resources are unused or misallocated)

misallocated resources

\-assigned to task that they are nat the best match for

Tradeoff

\-choices along the PPF

\-what is given up to produce more of the other g/s

\-causes opportunity cost

opportunity cost

\-**highest value alternative** given up to have what you have

\-inverse ratio between g/s’s (same/reverse both ways)

\-both money cost doing something and the alternatives you have been doing **(money and time)**

\-increases as production of goods increases

allocative efficiency

\-g/s produced at lowest possible cost, in quantities with greatest benefit

marginal cost

\-opportunity cost of **producing 1 more unit** of a g/s

\-in contrast to MB

marginal benefit

\-benefit of **consuming 1 more unit** of a g/s

\-in contrast to MC and Production possibility

\-what your **willing** **to pay** for something

marginal benefit curve

\-relationship between MB of g/s and quantity consumed

\-unrelated to PPF

\-more you have of something, less your willing to pay for it (principle of decreasing MB)

Comparative advantage

\-can perform activity at lower **opportunity cost** than anyone else (difference in ability/resources)

\-still a tradeoff between activities for most ppl

\-difference in opportunity cost is the source of comparative advantage

Absolute advantage- more **productive** than others

\-if you have an absolute advantage in one task, you do not have a comparative advantage

economic growth

\-expansion of the production possibilities

\-comes from changes in technology + capital accumulation

\-increases standard of living (doesn’t overcome scarcity/opportunity cost)

Tradeoff: The faster economy grows, greater opportunity cost of economic growth

capital accumulation

growth in capital resources, including human capital (labor, intellectual resources)

market

any arrangement that lets buyers and sellers meet and make voluntary trade

Property rights

\-govern the ownership, use, and disposal of anything ppl value

\-incentivize ppl to specialize for comparative advantage

**Real Property**- land/buildings/goods

**Financial property**- stocks/bonds/money

**Intellectual property**- intangible product of creative energy (books/music/code)

Money

\-token accepted as payment

\-”money'“ makes economies more efficient

Circular flow

\-how money moves through society