increasing marginal opportunity costs.

Marginal opportunity costs increase

because some workers, machines, and other resources are better suited to
some uses than to others. At point , some resources that are best suited to
making cars are used to perform operations.
The more resources already devoted to an activity, the smaller the payoff to
devoting additional resources to that activity. For example, the more hours
you have already spent studying economics, the smaller the increase in your
test grade from each additional hour you spend studying—and the greater
the opportunity cost of using the hour in that way. The more funds a firm
devotes to research and development during a given year, the smaller the
amount of useful knowledge it receives from each additional dollar—and the
greater the opportunity cost of using funds in that way. The more money the
federal government spends on making youth aware of the harms caused by
cannabis use, the smaller the impact of each extra dollar spent on
advertising campaigns—and, once again, the greater the opportunity cost of
using the money in that way.

As more economic resources become available, the economy can move

from point A to point B, producing more operations and more automobiles.

Shifts in the production possibilities frontier represent economic growth.

• Absolute advantage: The ability to produce more of a good or
service than others, using the same amount of resources.
• Comparative advantage: The ability to produce a good or service at
a lower opportunity cost than others.
We have just derived an important economic principle: The basis for trade is
comparative advantage, not absolute advantage. The fastest apple pickers do
not necessarily do much apple picking. If the fastest apple pickers have a
comparative advantage in something else—for example, picking cherries,
playing hockey, or being economists—they are better off specializing in that
other activity and so is everyone else. Individuals, firms, and countries are
better off if they specialize in producing goods and services in which they have
a comparative advantage and trade to get the other goods and services they
aren’t producing.

Keep these two key points in mind:

1. It is possible to have an absolute advantage in producing something without

having a comparative advantage. This is the case with your neighbour and
picking apples.
2. It is possible to have a comparative advantage without having an absolute
advantage. In our example, you have the comparative advantage in picking
apples, even though your neighbour can pick more than you.

Types of Market
In the circular flow model, the product markets refer to markets where goods
such as computers or services such as medical treatment are offered.
The factor markets refer to the collection of markets where the factors of
production (land, labour & capital) are bought and sold. The financial markets
refer to the markets where financial assets such as stocks and bonds are
bought and sold. In the simplest version of the circular flow model, the financial
markets are not shown. The term free markets merely refers to a market with
little or no government intervention.

Contracts, insurance, patents, and accounting rules are inventions that

make a market work better.
While markets appear to have emerged naturally, these other inventions were
created to make free markets function even better by standardizing information,
protecting private property and governing transactions. These innovations are
enforced more in market economies than in centrally planned economies.

An outward shift in the production possibilities frontier represents

economic growth that is only attainable through an increase in available
resources or a technological improvement. Therefore, higher levels of
unemployment would shift production to points inside the existing production
possibilities frontier instead of shifting the curve outward. Depletion of iron ore
would shift the PPF inward since fewer resources would be available to produce
both automobiles and aircraft carriers. And, a change in technology that only
impacts the auto industry would shift the PPF in a manner similar to the graph
on the right. Conversely, an advance in technology that impacts both industries
would shift the entire PPF outward so that more units of both goods can now be
produced.
When production is moved to another country and then the completed product
moved back to the home country it is known as outsourcing.
GDP AS A MEASURE OF WELL-BEING
GDP represents a short-sighted representation of a country’s real well being.
The flow of money doesn’t account for important factor such as access to health
care, free time, natural resources and other non-economic factors.
Economic growth isn’t always a synonym of progress.
In the early stages of a family getting out of poverty, the income and happiness
is directly proportional, however, after a certain point, the happiness caused by
money doesn’t continue to grow.
In some cases, they population of a measured country showed more happiness
than what the models predicted. For example, happiness in Latin America
countries is higher than the economic status would suggest.
 The policies are more effective when they consider not only the
economic results but also the effect in other areas, since there’s no
demonstrated relationship between the level of possession and the level
of well-being.
 The amount of hours at work can be a decisive factor in measuring well
being
 The measure of GDP encourages the overexploitation of natural
resources, focusing on the economic output over the conservation of the
planet.
 GDP doesn’t account for the depreciation of capital goods, overstating
the value of production.
 Worth of services not supplied through markest such as healthcare,
education, owner housing, child care and schooling.
 Bankers and borrowers’ exaggerated sense of well being comes from
factors like low inflation.
Circular-flow diagram: Shows the links between households and firms.
 Households provide factors of production to firms.
 Firms provide goods and services to households.
 Firms pay money to households for the factors of production.
 Households pay money to firms for the goods and services.
 • A free market is one with few government restrictions on how goods or
services can be produced or sold, or on how factors of production can be
employed.
However governments still have a role to play, including:
Protection of private property
• When others can take your wages or profits, households and firms have
little incentive to work hard.
• Property rights—the rights individuals or firms have to the exclusive use
of their property, including the right to buy or sell it—are essential here.
• Enforcement of contracts and property rights
• Without a stable and effective government, specialization and trade is
next to impossible – trade requires property rights.
CONCLUSION

The fact that the PPF is bowed outward tells us that the opportunity cost of
producing more cars depends on where the economy currently is on the PPF.
For example, to increase the production of cars from 0 to 200—moving from
point to point —the economy has to give up only 50 operations. To increase the
number of cars by another 200 (for a total of 400)—moving from point to point
—the economy has to give up another 150 operations.
 The production possibilities frontier (PPF) is a curve that shows the maximum
attainable combinations of two products that may be produced with available
resources.
 The PPF is used to illustrate the trade-offs that arise from scarcity.
 Points on the frontier are technically efficient.
 Points inside the frontier are inefficient, and points outside the frontier are
unattainable.
 The opportunity cost of any activity is the highest-valued alternative that must
be given up to engage in that activity.
 Because of increasing marginal opportunity costs, PPFs are usually bowed out
rather than straight lines. This illustrates the important economic concept that the
more resources that are already devoted to any activity, the smaller the payoff
from devoting additional resources to that activity is likely to be. Economic
growth is illustrated by shifting a PPF outward.