ECON 100 1st Edition Lecture 4 Outline of Last Lecture I Four Topics That Illustrate Tension Between Self and Social Interest A Globalization B Information Age Monopolies C Climate Change D Economic Instability II 6 Key Ideas Define The Economic Way of Thinking III Economics As a Social Science A Economic Models IV Economics As a Policy Tool Outline of Current Lecture I Production Possibilities Frontier A Production Efficiency B Trade off Along PPF 1 Marginal Cost vs Marginal Benefit II Marginal Benefit Curve A Production Efficiency B Allocative Efficiency III Economic Growth A Technological Change vs Capital Accumulation B Opportunity Cost C Trade 1 Comparative Advantage 2 Absolute Advantage Current Lecture If we want to increase production of one good we must decrease production of something else trade off Production Possibilities Frontier PPF the boundary between those combinations of goods and services that can be produced and those that cannot To illustrate PPF focus on 2 goods at a time hold quantities of all other goods constant model economy ceteris paribus Illustrates scarcity because points outside the frontier are unattainable Points inside the frontier are attainable but inefficient These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Production Efficiency we cannot produce more of one good without producing less of another good We produce goods at lowest possible cost Occurs at all points on the PPF Production inside the PPF inefficient Resources are unused idle but could be working Resources are misallocated assigned to tasks for which they are not the best match Trade off along the PPF Opportunity cost is a ratio decrease of one good increase of other good PPF bows outward because resources are not equally productive in all activities As the quantity produced of each good increases so does its opportunity cost Best point on the PPF where goods services are produced in the quantities that provide the greatest possible benefit and at the lowest possible cost allocative efficiency Marginal cost calculated from slope of PPF Steeper slope higher marginal cost Marginal benefit from a good service benefit received from consuming one more unit of it This benefit is subjective based on preferences Measured by how much someone is willing to pay for an additional unit To describe preferences economists use the concepts of marginal benefit and marginal benefit curve Marginal benefit curve shows relationship between the marginal benefit from a good and the quantity consumed of that good unrelated to PPF The principle of decreasing marginal benefit the more we have of a good the small is its marginal benefit Production efficiency we cannot produce more of any one good without giving up some other good Producing at a point on the PPF Allocative Efficiency we cannot produce more of any one good without giving up some other good that we value more highly Producing at the point on the PPF that we prefer above all others Marginal benefit marginal cost Economic Growth The expansion of production possibilities Increases our standard of living Two key factors Technological change development of new goods and of better ways of producing goods and services Capital Accumulation growth of capital resources which includes human capital The opportunity cost To use resources in research and development and to produce new capital we must decrease our production of consumption goods services Economic growth is not free results in less current consumption An investment shifts PPF outward in the future Trade Comparative Advantage person can perform an activity at a lower opportunity cost than anyone else compare opportunity costs Absolute Advantage person is more productive than others compare productivities production per hour Specialization producing only one good or a few goods and trading with others to obtain what you do not produce