Chapter 2

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Opportunity cost:
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The value of the best alternative opportunity forgone
What you give up
Subjective
$ plus utility
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Utility – satisfaction or enjoyment from an action

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Are combined to produce outputs of goods and services
Inputs
Productivity – the ability of a resource to produce output.

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Land – natural resources in their natural state
Labor – human capital
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Human capital is acquired skills and abilities embodied within a person
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Capital – anything that is produced in order to increase productivity in the future.
Physical capital – buildings, machinery, etc

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Is taking personal initiative to combine resources in productive ways
Technology – possible techniques of production

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A model that shows the various combinations of two goods the economy is capable of producing
Scarcity and choice
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125 140
150 125
175 110
190 125
200 0

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A .D
A./B –efficient points
C. – inefficient point
D. – unattainable given the assumptions
B
.C
Any point on the line is efficient
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Marginal opportunity cost which is the additional opportunity cost from one more unit of output
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Law of increasing cost – the rise in the marginal opportunity cost of producing a good is more of that good is produced.

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Technological efficiency
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Using the production process to the minimum waste of resources
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Allocative Efficiency
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Implies a specific point on the production possibilities frontier that is the most valuable combination of inputs.
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Only one point

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Production possibilities will depend on how much of each resource the economy has and on the technology that is available to make use of those resources.
Assumptions:
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Fixed resources
Fixed technology

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The ability of the economy to produce more or better output.
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Change in technology
Change in resource base
Frontier shifts outward

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The production possibilities frontier shows how much of one good can be produced for any feasible amount of another good
If an economy is on its frontier, the opportunity cost of producing more of one good is less of another good

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The production possibilities frontier is bowed outward, consistent with the law of increasing cost, which notes the increasing marginal opportunity cost of additional output
Every point along the production possibilities frontier is technological efficient

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Points inside the frontier imply some unemployed or misallocated resources and are thus inefficient
Points outside the frontier are unattainable with current resources and technology
Economies grow by acquiring resources or better technology, which shifts the frontier outward
If the economy acquires resources that are specialized in the production of certain good, the production possibilities frontier expands outward

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Money – a medium of exchange that removes the need for barter, also a measure of value and a way to store value of time

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The exchange of goods and services directly for one another, without the use of money

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A model of economy that depicts how the flow of money facilitates a counter flow of resources, goods, and services in the input and output markets

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Output market
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The market where goods and services are bought and sold
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Input market
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The market where resources are bought and sold

Output Market
Input Market
Money
Goods

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The ability to produce a good at a lower opportunity cost (other goods forgone) than others could do
Produce the good with lowest opportunity cost and trade for good for highest opportunity cost
Buy cheap => Sell dear
Example

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The ability to produce a good with fewer resources than other producers.
To gain from trade, specialize according to comparative advantage, whether or not you have any absolute advantage

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Countries gain from trade whether or not they have an absolute advantage in anything

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Exports - Goods and services a country sells to other countries
Imports – goods and services a country buys from other countries

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Through trade, a country can consume a combination of goods and services that lies outside its production possibilities frontier, meaning the country’s consumption possibilities will exceed its production possibilities.
example