Chapter 3.doc

Chapter 3: The Economic Problem Production and Possibilities Obstacles to Production: Resources Technology Rational Choice necessitates an analysis of costs and benefits Production Possibilities Frontier (PPF) Definition = Boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of goods and state of technology Paradox of the PPF = In order to produce one good or service the production of other goods and services must be forgone. Valuable for illustrating the effects of scarcity Distinguishes between 3 features of Production: Attainable and Unattainable Combinations Efficient and Inefficient Production Tradeoffs and Free Lunches Production Efficiency = Situation where we can?t produce more of a good or service without producing less of something else Tradeoff = Giving up one thing to get something else Free Lunch = Getting something without giving anything up Opportunity Cost Definition = The best thing you must give up to get something What?s forgone/What?s gained Magnitude of the slope of the PPF measures opportunity cost Economic Growth Definition = Sustained expansion of production possibilities Key Factors: Development of Better Technologies Improving Education On-the-job training and Work Experience Acquisition of more machines Capital Production is directly proportional to production possibility Can only be continued if consumption is less than the maximum level Specialization and Trade Specialization = Concentrating on the production of only one good Comparative Advantage = Ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else Absolute Advantage = When one person is more productive than another in several/all activities.