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PPF, Comparative Advantage, Marginal Decision Making
Scarcity is the central problem of economics. Scarcity is a condition where there are unlimited wants and limited resources. Resources are Land, Labor, and Capital.
When making a decision, consumers consider the opportunity cost of their decisions. Opportunity costs are the cost of the next best foregone alternative. In Microeconomics, this might be called the relative cost.
A production possibilities curve is bowed out from the origin. The curve when bowed out is called “concave” and represents an increasing cost curve. When costs are increasing, it means that the next unit, or marginal unit, comes at a higher cost. I call this the Law of Low Hanging Fruit. That is, the easiest resources are grabbed first which comes at the lowest opportunity cost.
An increasing cost curve suggests that resources are not perfectly substitutable. It also suggests that points along the curve are efficient given the choices that society makes. The production possibilities curve also shows that resources are fixed, points inside the curve are inefficient, and points outside of the curve are unattainable.
When a good is scare, people have to want it. In other words, people don’t want AIDS so it’s not desirable.
A good is anything that brings utility. Utility is satisfaction. A bad brings no utility. When looking at the circular flow of resources, that why the product market is labeled, “Goods and Services.”
There are three questions that every economic system must answer. Those questions are: What will be produced; How should the goods and services be distributed; and How the goods and services should be made.
A straight-line PPF shows there are constant opportunity costs between two goods.
A PPF can shift when one of the assumptions are relaxed. Those assumptions are: the economy can only make two goods, that resources are fixed, and technology remains constant. A change in any the quantity of resources can shift the PPF in either direction.
Capital goods are goods used to make other goods. These goods include tools, buildings, and machines. A consumer good is like a television, computer, food, or a car.
Comparative advantage means that the country that can produce the good at the lowest opportunity cost should produce the goods.
The concept of marginal analysis infers that an activity should continue as long as the marginal benefit is greater than the marginal cost.