Professional Documents
Culture Documents
Basic Concepts
Basic Concepts
Key Takeaways:
Economic efficiency is when every scarce resource in an economy is used and
distributed among producers and consumers in a way that produces the most
economic output and benefit to consumers.
Economic efficiency can involve efficient production decisions within firms and
industries, efficient consumption decisions by individual consumers, and efficient
distribution of consumer and producer goods across individual consumers and firms.
Pareto efficiency is when every economic good is optimally allocated across
production and consumption so that no change to the arrangement can be made to
make anyone better off without making someone else worse off.
O pportunity Cost
Opportunity cost is the value of something when a particular course of
action is chosen. Simply put, the opportunity cost is what you must
forgo in order to get something. The benefit or value that was given up
can refer to decisions in your personal life, in a company, in the
economy, in the environment, or on a governmental level.
Simply, opportunity cost is the cost of best alternatives or it is the cost
of second best choices.
An easy example of opportunity cost
For example, instead of attending classes you had many opportunities
to do. Suppose, you could –
1. Sleep
2. W atching movie
3. Travelling
4. Praying
5. Playing etc.
Among all of these alternatives, suppose you could get more pleasure
from sleeping. That is sleeping is the best alternative of attending class.
So we can say that, the opportunity cost of attending class is sleeping.
Some examples of O pportunity Cost
• The opportunity cost of taking a vacation instead of spending the money on a new
car is not getting a new car
• If you decide not to go to work, the opportunity cost leisure is the lost wages.
• W hen the government spends $15 billion on interest for the national debt, the
opportunity cost is the programs the money might have been spent on, like
education or healthcare.
• For a farmer choosing to plant corn, the opportunity cost would be any other crop
he may have planted, like wheat or sorghum.
• Tony buys a pizza and with that same amount of money he could have bought a
drink and a hot dog. The opportunity cost is the drink and hot dog.
• M ario has a side business in addition to his regular job. If he decides to spend
more time on his side business, the opportunity cost is the wages he lost from his
regular job.
Economic G row th
Economic growth is an increase in the the production of economic goods and
services, compared from one period of time to another. It can be measured in
nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic
growth is measured in terms of gross national product (G N P) or gross domestic
product (G D P), although alternative metrics are sometimes used.
N ote that-
• Economic growth is an increase in the production of goods and services in an
economy.
• Increases in capital goods, labor force, technology, and human capital can all
contribute to economic growth.
• Economic growth is commonly measured in terms of the increase in aggregated
market value of additional goods and services produced, using estimates such as
G D P.