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2 THE ECONOMIC
PROBLEM
when pizza production is relatively large will require society to devote to pizza production
those resources that are less suited to making pizza and more suited to making smartphones.
This reallocation of resources yields a relatively small increase in pizza output for a large
decrease in smartphone output, creating a relatively high opportunity cost reflected in the
steep slope of the PPF over this range of output. The opportunity cost of pizza production
increases with the quantity of pizza produced as the slope of the PPF becomes ever steeper.
This effect creates the bowed-out effect and means that as more of a good is produced, the
opportunity cost of producing additional units increases.
Page 39
1. What is marginal cost? How is it measured?
Marginal cost is the opportunity cost of producing one more unit of a good or service. The
magnitude of the slope of the PPF is the marginal cost of a unit of the good measured on the
x-axis. As the magnitude of the slope changes moving along the PPF, the marginal cost
changes.
2. What is marginal benefit? How is it measured?
The marginal benefit from a good or service is the benefit received from consuming one more
unit of it. It is measured by what an individual is willing to give up (or pay) for an additional
unit.
3. How does the marginal benefit from a good change as the quantity produced of
that good increases?
As more of a good is consumed, the marginal benefit received from each unit is smaller than
the marginal benefit received from the unit consumed immediately before it, and is larger than
the marginal benefit from the unit consumed immediately after it. This set of results is known
as the principle of decreasing marginal benefit.
4. What is allocative efficiency and how does it relate to the production possibilities
frontier?
Allocative efficiency is a situation in which goods and services are produced at the lowest
possible cost and in the quantities that provide the greatest possible benefit. We cannot
produce more of any good without giving up some of another good that we value more highly.
The allocative efficient level of output is the point on the PPF for which marginal benefit
equals marginal cost.
5. What conditions must be satisfied if resources are used efficiently?
Resources are used efficiently when more of one good or service cannot be produced without
producing less of some other good or service that is valued more highly. This is known as
allocative efficiency and it occurs when: 1) production efficiency is achieved, and 2) the
marginal benefit received from the last unit produced is equal to the marginal cost of
producing the last unit.
Page 44
1. What gives a person a comparative advantage?
A person has a comparative advantage in an activity if that person can perform the activity at
a lower opportunity cost than anyone else. If the person gives up the least amount of other
goods and services to produce a particular good or service, the person has the lowest
opportunity cost of producing that good or service.
2. Distinguish between comparative advantage and absolute advantage.
A person has a comparative advantage in an activity if that person can perform the activity at
a lower opportunity cost than anyone else. A person who is more productive than others has
an absolute advantage. Absolute advantage involves comparing productivities—production
per hour—and comparative advantage involves comparing opportunity costs.
3. Why do people specialize and trade?
People can compare consumption possibilities from producing all goods and services through
self-sufficiency against specializing in producing only those goods and services that reflect
their comparative advantage and trading their output with others who do the same.
Consumption possibilities from specialization and trade are greater than under self-
sufficiency. So it is in people’s own self-interest to specialize.
4. What are the gains from specialization and trade?
From society’s standpoint, the total output of goods and services available for consumption is
greater with specialization and trade. From an individual’s perspective, each person who
specializes enjoys being able to consume a larger bundle of goods and services after trading
with others who have also specialized, than would otherwise be possible under self-
sufficiency. These increases are the gains from specialization and trade for society and for
individuals.
5. What is the source of the gains from trade?
As long as people have different opportunity costs of producing goods or services, total output
is higher with specialization and trade than if each individual produced goods and services
under self-sufficiency. This increase in output that arises from divergent opportunity costs is
the gains from trade.
6. Why do specialization and the gains from trade make the economy’s PPF bow
outward?
Initially, a good is produced by the producers with the lowest opportunity costs of production.
But as more and more of the good is produced, producers with higher opportunity costs of
production begin to produce the good. The slope of the PPF increases as producers with higher
opportunity costs begin production, giving the PPF a bowed-out shape.
7. Why is not specializing and reaping the gains from trade inefficient?
Failure to specialize and trade means that producers are not producing the good in which they
have a comparative advantage, and production occurs inside the PPF—a point of inefficiency.
All the economy’s resources are fully employed, but they are misallocated.
Page 47
1. What generates economic growth?
The two key factors that generate economic growth are technological change and capital
accumulation. Technological change is the development of new goods and of better ways of
producing goods and services. Capital accumulation is the growth of capital resources,
including human capital.
2. How does economic growth influence the production possibilities frontier?
Economic growth shifts the PPF outward.
3. What is the opportunity cost of economic growth?
When a society devotes more of its scarce resources to research and development of new
technologies, or devotes additional resources to produce more capital equipment, both
decisions lead to increased consumption opportunities in future periods at the cost of less
consumption today. The loss of consumption today is the opportunity cost borne by society for
creating economic growth.
“‘Even now,’ he adds, ‘after waiting for the Cafila, which will be
immense, near 400 men, and, they say, 2,000 camels, I am not even
going with it. I should, by all accounts, as a Christian and a doctor,
be worried to death. I go straight from this to Arowan, never touching
the Cafila route at all; we shall not see a single tent. There are some
wells, known only to two or three of the guides. We take five naggas
(she camels) for milk, the five men, and Mohammed El Abd, some
zimēta (barley meal). I take the biscuit for Abou and self; each
carries a skin of water, to be touched only if the milk fails: thirty days
to bring us to Arowan, and five more to Timbuctoo.’
“I have made the above extracts to assure you that the
arrangements were made, and Mr. Davidson ready to start at a
moment’s notice, and that in the course of two or three days I hope
to have the pleasure to acquaint you of his having proceeded on his
journey. Once away from Wád Nún, and I have every and the fullest
confidence of his efforts being crowned with success.
“I have the honour to be, Sir,
“Your most obedient servant,
“Wm. Willshire.”
“P.S.—I open this letter to add, I have received a letter from Mr.
Davidson, dated Saturday, the 5th inst., who appears in high spirits,
and writes,—
“‘The start is to be on Monday, although I do not go on that day;
everything is now packed up, and placed ready to be put on the
camels, with which Abou starts at day-break on Monday. I am to be
left here, as if having sent him on. Mohammed El Abd remains
behind. On Wednesday or Thursday, according to the distance made
by the camels on the first day, we start on horseback, accompanied
by Beyrock and about six horsemen, and are to make Yeisst, if
possible, in one day. Here I leave the district of Wadnoon. And to this
place is three days’ journey for loaded camels. I here leave my horse
and mount my camel, and we push on to the tents.’
“Mr. Davidson did not start on a sudden, on the 3d inst., as stated
to me by a courier, who brought me a letter from him of that date,
and which I reported in a letter I had the honour to address to his
Majesty’s secretary of state, Viscount Palmerston, on the 8th inst.,
and which you will oblige me by correcting and making known to his
lordship.
“Your most obedient servant,
“W. W.”
The following extracts from Mr. Willshire’s letters will give all the
intelligence received respecting the sequel of Mr. Davidson’s
expedition:—
Society of London:—
“To the Noble Prince, exalted by the Lord, Mulai Abd Errachnan ben
Hussein, whom God protect.
“An English gentleman having arrived at Gibraltar within a few
days past, as bearer of a letter, which he is charged to deliver to his
Imperial Majesty, from the King my most gracious sovereign, may it
please your Imperial Majesty to deign to cause me to be informed
when and where it may be convenient for your Imperial Majesty to
receive the bearer of the royal letter.
“Peace—this 20th day of September, in the year of Christ 1835
(26th Joomad the 1st, 1251).
“Edw. Drummond Hay,
“H. B. M.’s Agent and Consul-General in Morocco.”
“In the name of the merciful God, and there is no power or
strength but in God the high and excellent.
“To the faithful employed Drummond Hay, Consul for the English
nation—this premised—
“Your letter has reached our presence, exalted of God, regarding
the gentleman who arrived at Gibraltar with a letter from the Pre-
eminent of your nation; in consequence whereof, if he please to
deliver the letter to our employed, the kaid ............[202] Essedy, for the
purpose of being forwarded to our presence, exalted of God, he may
do so; but if he wish to bear it himself, he is to proceed to Swerrah
by sea, and thence he may come to our high presence, since the
voyage by sea is more convenient than that by land, and the journey
from the said port to our presence is short.
“Peace—11th Joomad the 2d, 1251 (4th October, 1835).
THE END.
LONDON:
Printed by J. L. Cox and Sons, 75, Great Queen Street,
Lincoln’s-Inn Fields.
FOOTNOTES: