ch02 basic
TRANSCRIPT
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Chapter 2
Choice,
Opportunity Costsand Specialization
Economics, 7th Edition
Boyes/Melvin
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Opportunity Cost
Opportunity cost: the value of thehighest-valued alternative that must beforgone when a choice is made. It is theevaluation of a trade-off.
Marginal benefits and costs: the benefitsand opportunity costs associated with oneadditional unit of the good.
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Opportunity Costs and Concerts
Youve just won a free ticket to see a Madonnaconcert. U2 is performing on the same night.Tickets to see U2 cost $75. On any given day,you would be willing to pay up to $100 to see
U2. Based on this information, what is theopportunity cost of seeing Madonna? (a) $0,(b) $25, (c) $75, or (d) $100.
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Opportunity Costs
The opportunity cost of seeing Madonna is thetotal value of everything you must sacrifice toattend her concert - namely, the value to you ofattending the U2 concert. That value is $25 - the
difference between the $100 that seeing hisconcert would be worth to you and the $75 youwould have to pay for a ticket.
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Decision Making
Principle: Decision making involvestrade-offs.
A trade-off means a sacrifice--giving upone good or activity in order to obtainsome other good or activity .
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Production Possibilities Curve
The production possibilities curve showsthe maximum quantity of goods andservices that can be produced when theexisting resources are used fully andefficiently.
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Production Possibilities
Underutilized
(Inefficient)
Nondefense Goods
B1
F1C1
D1
Only nondefensegoods produced
E1
Only defensegoods produced
A1
EfficientCombinations
Defense Goods
Impossible
200
175
150
125
100
75
0
7525 50
G1
100 125
Defense Non-defense
A1 200 0
B1 175 75
C1 130 125
D1 70 150
E1 0 160F1 130 25
G1 200 75
150
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Growth
The PPC moves outward (growth occurs)as the result of: Increased resources
Larger labor force
Change in labor force participation Chance in labor-leisure decision
Improved technology (innovation)
Expansion of capital stock
An improvement in the rules (laws, institutions,and policies)of the economy
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A Shift of the PPC
Nondefense Goods
B1
C1
D1
E1
A1Defense Goods200
175
150
125
100
75
0
7525 50
B2
100 125 150
225 A2
C2
D2
E2
F2
Defense Non-defense
A2 225 0
B2 200 75
C2 175 120
D2 130 150
E2 70 160
F2 0 165
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Marginal Opportunity Cost
The Production Possibilities Curve (PPC)illustrates the concept ofopportunity cost.Each point on the PPC means that every otherpoint is a forgone opportunity.
The PPC bows outward because there areever-increasing marginal opportunity costs tothe production of any good.
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Specialization
Economic agents (individuals, firms, nations)will be better off if they choose to producethose things for which they have the lowestopportunity costs, and trade for those with
higher costs.
Agents do this because such choices involvegiving up the least amount of other things.
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Specialization & Trade
Comparative Advantage: the ability toproduce a good or service at a loweropportunity cost than someone else.
Law of comparative advantage: proposition that the joint output of trading
partners will be greatest when each good is
produced by the low opportunity cost producer.
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Private Property Rights
Private property rights are necessary for amarket economy to develop. If no one ownssomething, no one has the incentive to take careof it.