Trade-Offs

Trade-offs and increasing OC

Additional units of butter require larger and larger sacrifices of guns ie; increasing OC.” The Law of Increasing OC”.

· Opportunity cost butter (measured as a ratio), guns forgone per additional unit of butter produced.

· OC butter = guns/butter

‘Increasing MC’

· Increasing OC implies that the cost of each additional unit produced rises

· Ie; marginal cost (MC) rises

· [study Parkin 34-35]

The principle of decreasing marginal benefit [Parkin p36]

· As more and more of a good is consumed, the marginal benefit (MB) derived, declines….

· Ie; as the amount consumed increases, willingness to pay(WTP) for more of it decreases.

Efficient Choice: Can one most highly valued ‘best choice ‘ be determined?

· The allocation of resources is efficient when:

· MB butter = MC butter

· If MC butter > MB butter, then reduces butter production

· If MC butter <>

Study Parkin P37

Points of production efficiency.

A1 is the point of allocative efficiency (MB=MC)

Economic Growth [Study Parkin pp 38-39]

PPF (Production Possibilities Frontier)