Economics 1021A/B Lecture Notes - Allocative Efficiency, Human Capital, Comparative Advantage

• School: Western University
• Department: Economics
• Course: Economics 1021A/B
• Professor: Ronald Wintrobe

Document Summary

If we stop producing pizza and move all the people who produce pizza into producing cola, we produce at point a. If we move from point c to point d, we must give up 3 million cans of cola to produce 1 million more pizzas. The additional million pizzas cost 3 million cans of cola: opportunity cost is a ratio. Using resources efficiently: marginal cost is the opportunity cost of producing one more unit. If pizza production increases from 1 million to 2 million, the quantity of cola decreases from 14 million cans to 12 million cans: so the opportunity cost of the second million pizzas is 2 million cans of cola. If we produce 2. 5 million pizzas, marginal cost and marginal benefit are equal and this allocation of resources is efficient. Liz has a comparative advantage in producing smoothies, and joe has a comparative advantage in producing salads.