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Part One • An Introduction to Economics and the Economy thing worth only $5, it is better off. In Figure 2-2, such net gains can be realized until pizza production has been reduced to 200,000.

Generalization: Resources are being efficiently allocated to any roduct when the marginal benefit and marginal cost of its out ut are equal (MB = MC). Suppose that by applying the above analysis to robots, we find their optimal (MB = MC) output is 7000. This would mean that alternative C on our production possibilities curve—200,000 pizzas and 7000 robots—would result in allocative efficiency for our hypothetical economy. (Key Question 9)

• The production possibilities curve illustrates four concepts: (a) scarcity of resources is implied by the area of unattainable combinations of output lying outside the production possibilities curve; (b) choice among outputs is reflected in the variety of attainable combinations of goods lying along the curve; (c) opportunity cost is illustrated by the downward slope of the curve; (d) the law of increasing opportunity costs is implied by the concavity of the curve.

• Full employment and productive efficiency must be realized in order for the economy to operate on its production possibilities curve.

• The production possibilities curve illustrates four concepts: (a) scarcity of resources is implied by the area of unattainable combinations of output lying outside the production possibilities curve; (b) choice among outputs is reflected in the variety of attainable combinations of goods lying along the curve; (c) opportunity cost is illustrated by the downward slope of the curve; (d) the law of increasing opportunity costs is implied by the concavity of the curve.

• Full employment and productive efficiency must be realized in order for the economy to operate on its production possibilities curve.

• A comparison of marginal benefits and marginal costs is needed to determine allocative efficiency—the best or optimal output mix on the curve.

UNEMFloyMENt, GRDwtH, aND THE FuTuRE

Let's now discard the first three assumptions underlying the production possibilities curve and see what happens.

Unemployment and Productive Inefficiency

The first assumption was that our economy was achieving full employment and productive efficiency. Our analysis and conclusions change if some resources are idle (unemployment) or if least-cost production is not realized. The five alternatives in Table 2-1 represent maximum outputs; they illustrate the combinations of robots and pizzas that can be produced when the economy is operating at full capacity—with full employment and productive efficiency. With unemployment or inefficient production, the economy would produce less than each alternative shown in the table.

Graphically, we represent situations of unemployment or productive inefficiency by points inside the original production possibilities curve (reproduced in Figure 2- ). Point U is one such point. Here the economy is falling short of the various maximum combinations of pizzas and robots represented by the points on the production possibilities curve. The arrows in Figure 2- indicate three possible paths back to full-employment and least-cost production. A move toward full employment and productive efficiency would yield a greater output of one or both products.

Production and the Standard of Living

Production and the Standard of Living

A Growing Economy

When we drop the assumptions that the quantity and quality of resources and technology are fixed, the production possibilities curve shifts positions—that is, the potential maximum output of the economy changes.

McConnell-Brue-Barbiero: Microeconomics, Ninth Canadian Edition

I. An Introduction to Economics

2. The Economic Problem: Scarcity, Wants, and Choices

© The McGraw-H Companies, 2003

CHAPTER TWO • THE ECONOMIC PROBLEM: SCARCITY, WANTS, AND CHOICES

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