ECON1020 Class Lecture Week 2 Section-9 W25

Chapter Overview

• Title: Trade-offs, Comparative Advantage, and the Market System

• Course Information:

  • Program: Business Microeconomics

  • Course Code: ECON1020

  • Level: 2

  • Week: 2

  • Date: January 15, 2025

Chapter Outline

• 2.1 Production Possibilities Frontiers and Opportunity Costs

• 2.2 Comparative Advantage and Trade

• 2.3 The Market System

Learning Outcomes

1. Production Possibilities Frontier (PPF): Analyze opportunity cost and economic growth in an economy.

2. Circular Flow of Income: Understand the operation in the market.

Production Possibilities Frontier (PPF)

• A graphical representation showing the maximum output combinations of two goods that an economy can produce given its resources.

• Indicates the efficiency of production.

• All points on the curve signify efficient production; points inside the curve indicate inefficiency; points outside are unattainable.

Key Definitions

• Scarcity: The condition where unlimited wants exceed the limited resources available to meet those wants.

• Trade-offs: Choosing one option over another due to limited resources that necessitate making choices.

Economic Concepts

Trade-offs and Opportunity Costs

• When resources are allocated to one product, they cannot be used for another.

• Opportunity Cost: The value of the next best alternative foregone when a choice is made.

Increasing Marginal Opportunity Costs

• Opportunity costs can increase as resources are reallocated because some resources are better suited for certain tasks than others.

Economic Growth

• Economic Growth: The capability of an economy to enhance the production of goods and services, shown by a shift of the PPF to the right.

• Associated with improvements in technology and availability of resources.

The Market System

• A market is defined by the interaction of buyers and sellers of goods and services.

• Households: Provide factors of production (labor, capital, natural resources) to firms and receive payments for these resources.

• Firms: Supply goods and services to households and pay for the factors of production.

• Circular Flow Model: Illustrates how resources and money flow between households and firms without the influence of government or foreign markets, simplifying the economic relationship.

Factors of Production

• Labour: The human effort available for work.

• Capital: Physical assets used in the production of goods and services.

• Natural Resources: Raw materials used in production.

• Entrepreneurial Ability: The skill of combining and managing production factors to create goods and services.

Application of Concepts

• Understanding the implications of scarcity in health care spending, demonstrated by trade-offs made during the COVID-19 pandemic, affects funding for non-emergency services.

Questions for Review

1. What trade-offs are involved in production possibilities?

2. Define concepts of efficiency and inefficiency in production.

3. How do opportunity costs change as more resources are allocated to a specific good?