chapter 2 - economic problem Flashcards
The budget line/budget constraints
Imagine a line on a graph that tells you what you can buy with your money.
It shows you all the different pairs of two products you can purchase, considering how much money you have and the prices of the products.
Individual economic problem
we have a lot of wants but not a lot of income
efficiency
refers to the exhaustion of your income
slope of PPF
tells us the opportunity cost (constant)
Production possibilities frontier(PPF)
It’s like a border that shows what we can and cannot produce with our resources.
Anything inside the border represents the combinations of goods + services that we can currently produce with our current resources
Anything outside the border is currently unattainable with our existing resources
Every choice along the PPF involves a ____ ?
tradeoff
why are points that lie on PPF efficient?
- each point along the curve represents a combination of goods + services that use all the resources available
- if ur at a point on the PPF, it means your using all the resources efficiently to produce goods + services without wasting any resources
- this level of efficiency is needed to max out production
how do we determine which alternative efficient quantities to make?
need to compare cost + benefits
what does PPF determine?
helps us understand the oppurtunity cost, which is what we have to give up in order to make more of something else
the marginal cost of goods/service
cost of making one more unit of it
ex: if u have pizza shop the marginal cost of producing one more pizza would include the cost of additional ingredients (like cheese, sauce, and toppings), additional labor to make the pizza, + any other variable costs associated with production.
Marginal benefit
how much ur willing to pay for an additional unit of the good/service
Principle of decreasing marginal benefit
The more you have of something you like, the less each additional one matters to you.
So, as you get more of something, you’re willing to pay less for each extra one.
Marginal benefit curve shows
shows the benefit of having more of something changes as u consume more
because as you consumer more of a good the curve basically shows us that our sanctification/benefit of that good changes with each additional unit consumed
when is production efficiency achieved
when u cant make more of any good without giving up another good (bc you’ve used up all the available resources effeicvtly)
when is allocative effiency achived
MB=MC
economic growth
- we can make more things than we have choices (people have more choices in when they wanna buy stuff)
- when the standard of living for people in a country improves(people have more money, better jobs…)
2 factors that influence economic growth
- technological change- when we make new things or find better ways to make what we already have
- capital accumulation- growth of capital resources
oppurtunity cost of exonomic grwoth
its what we give up to have economic growth
it means we might have to sacrifice fun stuff to invest things better for the future
economic growth = not free
true
point of allocative efficency
a point on the PPF where marginal benefit (what we gain from producing one more unit of a good) equals the marginal cost (the cost of making that one additional unit of good/service)
Let’s consider a simple example to illustrate allocative efficiency using marginal cost:
Imagine a small bakery that produces cupcakes. The bakery is currently deciding whether to produce one more batch of cupcakes.
Marginal Cost (MC): The bakery calculates that producing one more batch of cupcakes would require additional ingredients such as flour, sugar, and eggs, as well as additional labor and energy costs. The total cost of these resources and efforts represents the marginal cost of producing one more batch of cupcakes.
Marginal Benefit (MB): The bakery estimates that selling one more batch of cupcakes would bring in additional revenue, which represents the marginal benefit of producing one more batch.
if the balery finds that the MB of making one more batch is equal to the MC of producing that batch then you’ve achieved allocative efficiency
which means that the bakery is using there resources and making the cupcakes at a point where the benefits= costs
if the bakery findss that the MB of making one more batch is more than the MC then they might decide to make more cupcakes since each extra batch leads to them making more revenue than what it costs to bake more batches of cupaceks
if the opposite were to happen they could scale back the amount of cupcakes they ,aek
resource allocation
ecnomic growth ruires a tradeoff
gains from a trade
This means that when people specialize in what they’re good at and trade with others, everyone can get more of what they want.
comaprtive advantage
if you can make smoothies with less effort/resources than other –> u have comparative advantage in making smoothies
it also means you can make smoothies at a lower opportunity cost comapred to others
absolute advantage
when someones better/more efficeng at doing something compared to others
diff between absolute and comparitve advantge
alice can make 20 cookies in 20 mins and bob can only make 5 in 20 mins (so alice has abs advantage)
ABSOLUTE- someones better at making soemthing
comparative- soemoen who gives up less when they make something
- scarcity
- attainable and unattainable points
- opportunity cost
- the tradeoff between producing one good versus another
concepts that are shown by PPF
If Sam is producing at a point inside his production possibilities frontier, then he
can increase production of both goods with zero opportunity cost.
If Sam is producing at a point on his production possibilities frontier, then he
can increase the production of one good only by decreasing the production of the other.
A production possibilities frontier is negatively sloped because
any choice along the PPF involves a tradeoff.
On a graph of a production possibilities frontier, opportunity cost is represented by
the slope of the production possibilities frontier.
The bowed-out (concave) shape of a production possibilities frontier illustrates
increasing opportunity cost.
Sal sells hot dogs and hamburgers. The price of a hamburger is $5 and the price of a hotdog is $2. Sal’s opportunity cost of producing 1 hamburger is 3 hot dogs. What is Sal’s opportunity cost of producing 1 hot dog?
1/3 hamburger
A pizza parlour that is production efficient produces pizza and panzerotti along a straight-line PPF. One point on its PPF is 10 pizzas and 2 panzerotti. Another point on its PPF is 8 pizzas and 5 panzerotti. If the pizza parlour increases the quantity of pizza it produces from 8 to 10, what is the opportunity cost of producing one of the additional pizzas?
1.5 panzerotti
The most anyone is willing to pay for another purse is $30. Currently the price of a purse is $40, and the cost of producing another purse is $50. The marginal benefit of a purse is
$30.
A florist is producing a quantity of bouquets at which marginal benefit exceeds marginal cost. Is the florist attaining allocative efficiency?
No. The florist must increase production to attain allocative efficiency.
How does allocative efficiency relate to the PPF?
The allocatively efficient point is
the point on the PPF at which marginal benefit equals marginal cost.
Debra has an absolute advantage in producing administrative services when she
can produce more administrative services than anyone else, using the same quantity of inputs.
In an eight-hour day, Antony can produce either 24 baguettes or 8 kilograms of cheese. In an eight-hour day, Rudolph can produce either 8 baguettes or 8 kilograms of cheese.
Given Fact 2.3.1, the opportunity cost of producing 1 baguette is
1/3 kilogram of cheese for Antony and 1 kilogram of cheese for Rudolph.
Economic growth ________ overcome scarcity because ________.
does not; we can produce more goods and services but it is still impossible to satisfy all our wants
