CHapter 2

Define allocative efficiency

Efficiency of Resource Use means it is impossible to produce more of any good without giving up something that we value even more highly. Implies the chosen mix of products is the most preferred from among those that are possible

In a two good model in which the goods are pizzas and colas, how do we measure the opportunity cost of more pizza?

How many colas we are giving up

. Which points represent inefficient production? What are the two reasons for inefficient production?

Inefficiency would involve unused or misallocated resources.

Define marginal benefit. How is it measured?

MB is related to what one wants to do, not what one can do The benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that someone is willing to pay (read: give up) in order to get one more unit.

How does marginal decision making lead to an outcome characterized by allocative efficiency?

Marginal analysis determines the "best" choice from among those on the PPF

What is production efficiency? In a PPF diagram, which points represent efficient production?

Production efficiency is achieved if we cannot produce more of one good without producing less of some other good.

What is the production possibility frontier (PPF)?

The Production Possibility Frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot.

How does the marginal benefit of a good change as the quantity of that good produced increases?

The more we have of any one good or service, the smaller is our marginal benefit or willingness to pay of an additional unit.

Define marginal cost. How is it measured?

The opportunity cost of producing one more unit of a good or service. The marginal cost of an additional pizza is the quantity of colas that must be given up to get one more pizza. Note that this cost is measured in colas

Define opportunity cost as a ratio.

Tip #1: The opportunity cost of producing colas is the inverse or reciprocal of the opportunity cost of producing pizzas. (This is always true with 2 goods.) Tip #2: The (absolute value of the) slope of the PPF is always the opportunity cost of whichever good is on the horizontal axis.

How does the PPF illustrate scarcity?

Used to illustrate the maximum quantities of two goods that can be produced per unit time, ceteris paribus, when resources are scarce.

When we draw a PPF, ceteris paribus, what are some of the important things we are holding constant?

We assume a fixed amount of resources and a fixed technology. These are held constant when we draw a PPF.

24. What is a market?

any arrangment that enables buyers and sellers to get information and do its buisness with each other

3. What is a firm?

economic unit that hires the factors of production and organizes them to produce and sell goods and services

26. How do firms and markets coordinate economic decisions?

firms choose the quantities of factors of production to hire markets cordinate the decisions throught price adjeustments

Why would the PPF bow outward? (Hint: make sure you understand the two paragraphs of the left column on page 34 in your text!)

resources are not all equaly productive in all activities i can make rice and rachel can make mac and cheese but if we tried to do the opposite then we get a little increase in the other but a large decrease in the thing we are goood at making

What are property rights and what are the three kinds of property identified in the text? Whey are property rights necessary in a market economy?

the social arangments that govern the ownership, use, and disposal of anything that people value real, financial, and intelectual people have an incentive to produce goods in which they have a comparative advantage

True or false: the marginal cost information depicted by the MC curve in the bottom panel of Figure 2.2 is derived from the PPF.

true