ECON101 Lecture Notes - Lecture 2: Allocative Efficiency, Opportunity Cost

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lilacmouse857

27 Jun 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Wokia Kumase

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Increasing Opportunity Cost

 The Opportunity Cost of pizza increases as the quantity of pizza produced increases

 The outward bowed shape of PPF reflects the increasing Opportunity Cost

 Frontier steep: A large increase in the production of pizza costs a large decrease in coke

production so Opportunity Cost is high

 PPF is bowed since resources are not all equally productive in all activities

 If coke experts move to make pizza there is a small increase in pizza but a large decrease in coke

 Produce more of one good, must use resources that are less suited to that activity and more

suited to producing the other good – increasing Opportunity Cost

 Rate of productions increases = increase in Opportunity Cost

Using Resources Efficiently

 What point on PPF to produce? A- the point on PPF at which goods and services are produced in

the quantities that provide the greatest possible benefit

 When goods and services are produced at the lowest possible cost and in the quantities that

provide the greatest possible benefit = achieved allocative efficiency

The PPF and Marginal Cost (MC)

 The Opportunity Cost of producing one more unit

 Calculate MC from the slope of PPF

 More pizzas produced, PPF gets stepper, MC of pizza increases

Preferences and Marginal Benefit (MB)

 MB from goods and services: the benefit received form consuming one more unit of it

 Benefit is subjective depending on preferences

 MB and preferences stand in sharp contrast to MC and production possibilities

o Preferences: what people want

o PP: limits and constraints what’s feasible

 Illustrate preferences using Marginal Benefit Curve: MB from a goods and services consumed vs.

the quantity consumed of the goods and services - unrelated to PPF

o Measure MB by seeing the most one is willing to pay for an additional unit

o The most you are willing to pay for something is its MB

 The principle of decreasing MB: the more we have of good – smaller MB – willing to pay less for

additional unit

o We like variety – more of a good we get bored and want something else

 MB measured by what you are willing to pay is the quantity of other G+S you are willing to forgo

Allocative Efficiency

 Best point on PPF (allocative efficiency): cannot produce more of G without giving up some

other G that provides a greater benefit

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Document Summary

The opportunity cost of pizza increases as the quantity of pizza produced increases. The outward bowed shape of ppf reflects the increasing opportunity cost. Frontier steep: a large increase in the production of pizza costs a large decrease in coke production so opportunity cost is high. Ppf is bowed since resources are not all equally productive in all activities. Produce more of one good, must use resources that are less suited to that activity and more. If coke experts move to make pizza there is a small increase in pizza but a large decrease in coke suited to producing the other good increasing opportunity cost. Rate of productions increases = increase in opportunity cost. A- the point on ppf at which goods and services are produced in the quantities that provide the greatest possible benefit. When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit = achieved allocative efficiency.

Related Questions

Consider a production possibilities frontier (PPF) that is concave (bowed outward from the origin). Such a PPF displays increasing opportunity costs, meaning that the cost of producing additional units of both goods rises. What is the reason for increasing opportunity costs?

A. Market forces do not lead to equality between price and opportunity cost.
B. Management is disorganized and production is inefficient.
C. Some resources and skills cannot easily be adapted from their current uses to alternative uses.
D. As more of a good is produced, the inputs used to produce that good will increase in price.

orangesardine923

Q. Why does a nation experience increasing opportunity cost?

a. As the nation moves from a production point within the PPF to one on the PPF, opportunity costs increase.

b. Because the nation cannot produce at the unattainable production points that lie beyond the PPF.

c. Resources are not equally productive in producing different kinds of goods and services.

d. When the amount of resources increases, the opportunity cost of all goods and services increases.

azuremuskrat152

The opportunity cost of one more slice of pizza in terms of sodas is the

		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.
		the number of pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

		how money can be allocated among two kinds of goods.
		the limits to the future growth of a nation.
		the various combinations of output a nation can produce at a certain time, given its available resources and technology.
		that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		remains constant.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		increases.
		decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

		the economy is producing at a point within its PPF.
		PPF disappears.
		the economy is producing at a point beyond its PPF.
		the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

		its PPF will shift inward.
		its economic growth will slow down.
		its PPF will shift outward.
		some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

		the attainable point with full employment of all resources.
		attainable point without full employment of all resources.
		unattainable point without full employment of all resources.
		the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

		the available factors of production and the state of technology
		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

		more of both goods can be produced.
		the possibilities of tradeoffs diminish.
		a tradeoff is not possible because nations need all goods.
		the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

		I and iii
		ii only
		I, ii, and iii
		I only

1 point

QUESTION 10

To achieve gains from trade, a country

		needs to have an absolute advantage in the production of all goods.
		specializes in producing a good in which it has a lower opportunity cost.
		must produce at a point beyond its PPF.
		should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

		a comparative advantage
		more production efficiency
		a marginal benefit
		a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

		iii only
		ii only
		I only
		I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

		John has a comparative advantage in producing cakes.
		Phyllis has an absolute advantage in both goods.
		Phyllis has a comparative advantage in producing cakes.
		John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It decreases.
		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It remains constant.
		It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

		goods and services that people want.
		maximum combinations of goods and services that can be produced.
		resources the economy possesses, but not it is the level of technology.
		limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

		$14 billion
		$14 trillion
		$140 billion
		$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

		to increase the production of one product requires smaller and smaller sacrifices of the other good.
		to decrease the production of one product requires smaller and smaller sacrifices of the other good.
		to increase the production of one product requires larger and larger sacrifices of the other good.
		when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

		China will grow faster than India.
		India will be able to eliminate scarcity faster than China.
		India will be able to eliminate opportunity cost faster than China.
		India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

		zero opportunity cost.
		producing at a point that lies beyond the PPF.
		opportunity benefit.
		a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

		increasing the production of both goods.
		increasing the production of one good and decreasing the production of another.
		holding the production levels of both goods constant.
		decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

		but it can still benefit from specialization and trade.
		so does not need to trade with poor nations to achieve any gains from trade.
		so might not have a comparative advantage in producing any goods.
		so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

		more of all goods than another person.
		a good for a lower opportunity cost than another person.
		a good for a lower dollar cost than another person.
		more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

		the linear shape of the production possibilities frontier.
		bowed in the shape of the production possibilities frontier.
		bowed out the shape of the production possibilities frontier.
		the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

		I only.
		I and ii.
		I and iii.
		ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

		shift rightward.
		not shift because the society moves from one point on the frontier to a point inside the frontier.
		not shift because the society moves from a point inside the frontier to a point on the frontier.
		shift leftward.

1 point

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ECON101 Lecture Notes - Lecture 2: Allocative Efficiency, Opportunity Cost

ECON101 Full Course Notes

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