9/4/14

Microeconomics
ProfessorWard
Chapter2
Pages3139Outline
ProductionPossibilitiesandOpportunityCost
quantitiesofgoodsandservicesarelimitedbyavailableresourcesandtechnology
tradeoffincreaseproductionofonegoodyoumustdecreaseproductionofanother
ProductionPossibilitiesFrontierboundarybetweenthosecombinationsofgoodsand
servicesthatcanbeproducedandthosethatcannot
modeleconomyquantitiesproducedofonlytwogoodschange,whilethequantities
producedofallothergoodsandservicesremainsthesame.
ProductionPossibilitiesFrontier
Scarcitypointsoutsidefrontierareunattainable,describewhatcantbesatisfied
anypointsonorinsideaPPFareattainable
ProductionEfficiency
metwhenweproducegoodsandservicesatthelowestpossiblecost
onlywhenweproduceonthePPFdoweearnthelowestpossiblecostofproduction
productioninsidePPFisinefficientbecauseresourcesareeitherunusedormisallocated
orboth.
productioninsideisinefficientbecausewearegivingupmorethannecessaryofone
goodtoproduceagivenquantityofanother
Unusedresourcesareidlebutstillworking
Misallocatedareresourcesassignedfortasksinwhichtheyarenotbestmatch
TradeoffAlongthePPF
inordertogaininonedepartmentyoumustloseinanother
alltradeoffshaveopportunitycost
OpportunityCost
OCofanactionisthehighestvaluedalternativeforgone
thecostofproducingoneitemmayforgothequantityofanotheritem
OpportunityCostisaRatio
itisthedecreaseinthequantityproducedofonegooddividedbytheincreasein
thequantityproducedofanothergood
theOCofproducingoneitemisequaltotheinverseoftheOCofproducing
anotheritem(IE.pizzaandcola)
IncreasingOC
theOCofanitemincreaseswiththequantityproducedofthatitem

OCof(Pizza)isalargequantityof(Cola)produced
UsingResourcesEfficiently
ProductionEfficiencyisbestmadewhengoodsandservicesareproducedinthe
quantitiesthatprovidethegreatestpossiblebenefit
AllocativeEfficiencywhengoodsandservicesareproducedatthelowestpossiblecost
andinquantitiesthatprovidethegreatestpossiblebenefit

ThePPFandMarginalCost
MCofagoodistheopportunitycostofproducingonemoreunitofit
WecalculatetheMCfromtheslopeofthePPF
Asthequantityofanitemincreasessodoesthecost
PreferencesandMarginalBenefit
TheMarginalBenefitfromagoodorserviceisthebenefitreceivedfromconsumingone
moreunitofit*benefitdependsonpeopleslikesanddislikes
PreferencesdescribewhatpeoplelikeandwantbutProductionPossibilitiesdescribethe
limitsonwhatisfeasible
MarginalBenefitCurvecurvethatshowsrelationshipbetweentheMBofagoodand
thequantityconsumedofthatgood
MBCisunrelatedfromPPF
MBisthemostyouarewillingtopayforsomething
ThePrincipleofDecreasingMarginalBenefitthemorewehaveofagoodorservice
thelesswearewillingtopayforit
AllocativeEfficiency
mostpreferredpointonPPF
wewantMCandMBtobeequal
EconomicGrowth
theexpansionofproductionpossibilities
increasesourstandardofliving
CostofEconomicGrowth
TechnologicalChangeisthedevelopmentofnewgoodsandofbetterwaysof
producinggoodsandservices
CapitalAccumulationisthegrowthofcapitalresources(humancapital)
thefewerresourcesusedtoproducepizzathemoreresourcescouldbeusedtoproduce
pizzaovens(somorepizzacanbeproducedinthefutureatlesscost)
ANationsEconomicGrowth
ifanationonlyusedresourcestoproduceandnottoinvestinadvancingtechnology
theirproductionpossibilitieswillneverchange
decreaseintodaysconsumptionistheOCoftomorrowsincreaseinconsumption

Pages4047Outline
GainsFromTrade
specializationisproducingonlyonegoodorafewgoods
ComparativeAdvantageandAbsoluteAdvantage
comparativeadvantageiswhenthepersoncanperformtheactivityatalower
opportunitycostthananyoneelse
involvescomparingopportunitycosts
differencesinOCarisefromdifferencesincharacteristicsandabilitiesinresources
absoluteadvantageiswhenapersonismoreproductivethanothers
involvescomparingproductivities
doesnothaveCAineveryactivity
EconomicCoordination
centraleconomicplanningandmarketsaretwocompetingcoordinationsystems
Centraleconomicplanning
workspoorlybc.Economicplannersdontknowpeoplesproduction
possibilitiesandpreferences
productionendsupinsidethePPFandwrongthingsareproduced
DecentralizedCoordinationworksbest
FourComplementarySocialInstitutions
1)Firms
2)Markets
3)PropertyRights
4)Money
Firms
Firmaneconomicunitthathiresfactorsofproductionandorganizesthemtoproduce
andsellgoodsandservices
tobesuccessfulyouspecializeinprovidingretailservicesandbuyingfromotherfirms
thatspecializeinproducinggoods
Markets
marketisanyarrangementthatenablebuyersandsellerstogetinformationandtodo
businesswitheachother
networkofproducers,consumers,wholesalers,andbrokers
PropertyRights

propertyrightsthesocialarrangementsthatgoverntheownership,use,anddisposalof
anythingthatpeoplevalue
realproperty=landandbuildings
financialproperty=stocks,bonds,andmoneyinthebank
intellectualproperty=books,music,inventionsprotectedbycopyrightsandpatents
whentherearePRpeoplehaveincentivetoproducegoodswheretheyhave
ComparativeAdvantage
whentherearenoPRpeopledevotenottoproductionbuttoprotectionofitems
Money
anycommodityortokenthatisameansofpayment
tradeinmarketscanexchangeanyitemforanotheritem
moneymakestrademoreefficient
CircularFlowsThroughMarkets
tradinginmarketsforgoodsandservicesandfactorsofproductioncreatesacircular
flowofexpendituresandincomes
CoordinatingDecisions
marketscoordinatedecisionsthroughpriceadjustments
morehamburgersthanpeoplewant=makethemcheapersomorepeoplebuy