Production possibilities frontier PPF the boundary between those combinations of goods and services that can be produced and those that cannot focus on two goods at a time and keep everything else constant Production is possible at any point inside the PPF but some points are an inefficient use of resources Production efficiency producing goods and services at the lowest possible cost points on the PPF Inefficient if resources are unused or misallocated Unused resources are idle but could be working Misallocated resources are assigned to tasks for which they are not the best match Opportunity cost the highest valued alternative sacrificed Measured by something that we give up in order to get something else Ex The opportunity cost of producing more pizza is the soda we must sacrifice Opportunity cost is a ratio the decrease in the amount produced of one good divided by the increase in the amount of another good Allocative efficiency when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit Marginal cost the opportunity cost of producing one more unit of it calculated from the slope of PPF Marginal benefit the benefit received from consuming one more unit of it subjective depends on people s preferences Marginal benefit curve a curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good unrelated to PPF usually decreasing Measured by the most that people are willing to pay for an additional unit of that good Principle of decreasing marginal benefit the more we have of any good or service the smaller is its marginal benefit decreases because humans like variety decreases with quantity of good or service Allocative efficiency is achieved when marginal cost marginal benefit Economic growth the expansion of production possibilities increases our standard of living comes from technological change and capital accumulation does not abolish scarcity Technological change the development of new goods and better ways of producing goods and services Accumulation of factors of production the growth of capital labor immigration and population increase land and entrepreneurship education resources including human capital Biased growth When a country produces some more of one product but does not experience economic growth in another product Specialization producing one good or few goods Comparative advantage when a person can perform an activity at a lower opportunity cost than anyone else differences arise from differences in individual abilities Absolute advantage what a person has who is more productive than others Central economic planning economic coordination system works badly because government economic planners don t know people s production possibilities and preferences inefficient Decentralized markets economic coordination system requires four complementary social institutions Firms Firm an economic unit that hires factors of production and organizes those factors to produce and sell goods and services i e wal mart Market any arrangement that enables buyers and sellers to get information and to do business with each other Property Rights Property Rights the social arrangement that govern the ownership use and disposal of anything Real property land and buildings and durable goods like plants and equipment Financial property stocks and bonds and money in the bank Intellectual property intangible product of creative effort i e books music Money any commodity or token that is generally acceptable as a means of payment Markets Money Class notes The economic problem What is the optimal choice to produce We use the PPF to model the right choice Production Possibilities Frontier PPF the boundary between those combinations of goods and services that can be produced and those that cannot Producing one more cupcake 0 1 means the opportunity cost of one cupcake is giving up one unit of beer 15 14 Cupcakes 0 1 2 3 4 5 Beer 15 14 12 9 5 0 The opportunity cost of beer is the inverse opportunity cost of a cupcake When graphing use midpoint on x axis Beer Cupcakes Efficient production choice will be 1 on the PPF curve 2 the opportunity cost should equal the opportunity benefit Marginal cost of production Marginal benefit of consumption