1021 – Week 2
Production Possibilities & Opportunity Cost
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Production possibilities frontier (PPF) = the boundary between those combinations of goods and services
that can be produced and those that cannot.
Production efficiency = being on the PPF.
Key point: (marginal) opportunity cost is a ratio (i.e., a slope) from the PPF.
Using Resources Efficiently
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Allocative efficiency = producing goods and services at the lowest possible cost and in quantities that
provide the greatest possible benefit.
Marginal (opportunity) cost is calculated as slope of PPF.
Marginal benefit is given as marginal benefit curve.
Gains from Trade
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Absolute advantage = being able to do a task in less time.
Relative advantage = being able to do task at a lower opportunity cost.
Economic Growth
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Economic growth = expansion of production possibilities.
Technological progress = development of new goods and services, or new ways to produce them.
Capital accumulation = increase in (physical) capital or human capital.
Economic Coordination
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Firm = economic unit that hires factors and organizes them to produce and sell goods and services.
Market = arrangement that enables buyers and sellers to get information and do business.
Property rights = social arrangements that govern the ownership of factors, goods and services.
Money = commodity or token that is generally acceptable as a means of payment.