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What is the Economic Problem

Resources Efficiently Marginal cost- of a good or service is the opportunity cost of producing one more unit of it **the opportunity cost of producing one more pizza is the marginal cost of a pizza Preferences and Marginal Benefit Preferences are a description of a person’s likes and dislikes (economists use incepts of marginal benefit and marginal benefit curve) Marginal Benefit of a good or services is the benefit received from consuming one Chapter 2- What is the Economic Problem By littlest person is willing to pay for an additional unit of a good or service The more we consume the less the level of satisfaction for each additional unit Diminishing marginal benefit Allocation Efficiency -the point of allocation efficiency is the point on the APP at which marginal benefit equals marginal cost ** this is the efficient quantity of pizzas **marginal meaning for each additional pizza ***demonstrates best possible point on APP Economic Growth Economic growth- the expansion of production possibilities and increase in the standard of living Two key factors influence economic growth 1. Technological change 2.

Capital accumulation Technological change is the development of new goods and of better ways of producing goods and services Capital accumulation is

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the growth of capital resources, which is human capital The cost of economic growth Use resources in research and development and to produce new capital, we must decrease our production of consumption goods and services Economic growth in not free Opportunity cost of economic growth is less current consumption AKA you must save or growth **by using some resources to produce pizza ovens today, the APP shifts outward in the future Absolute Advantage vs. Comparative Advantage Absolutes who can do it quicker, better cheaper? If that person is more productive than others. 0 compare activities Comparatives has the lowest opportunity cost?

A person has the absolute advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else 0 compares opportunity cost Lie’s opportunity cost of a smoothie is 1 salad. Joey’s opportunity cost of a smoothie is 5 salads. Lie’s opportunity cost of a smoothie is less than Joey’s. *So Liz has a comparative advantage in producing smoothies. Joey’s Comparative Advantage Joey’s opportunity cost of a salad is 1/5 smoothie. Lie’s opportunity cost of a salad is 1 smoothie. Joey’s opportunity cost of a salad is less than Lie’s. **So Joe has a comparative advantage in producing salads. Liz and Joe trade: Liz sells Joe 10 smoothies and buys 20 salads. Joe sells Liz 20 salads and buys 10 smoothies. After trade: Liz has 20 smoothies and 20 salads. Joe has 10 smoothies and 10 salads.

Gains from trade: Liz gains 5 smoothies and 5 salads an hour Joe gains 5 smoothies and 5 salads an hour Economic Coordination To make coordination work, four complimentary social institutions have evolved over the centuries Firms Markets Property rights Money A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. A market is any arrangement that enables buyers and sellers to get information and do business with each other. Property rights are the social arrangements that govern ownership, use, and disposal of resources, goods or services. Money is any commodity or token that is generally acceptable as a means of payment.

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