Ch02-Lecture+Notes - Production Possibilities and...

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Production Possibilities and Opportunity Cost Resources used in production of various goods and services are limited. If you want more of one good or one type of service, you have to use more resources to produce it, which takes away resources to produce other goods and services. [ ] A production possibilities frontier (PPF) shows combinations of goods and services that can be produced if the resources (factors of production) are used efficiently (no waste). A PPF is downward sloping: To produce more of one good, you have to give up some of the other good. You face a tradeoff between one good and another. The slope of PPF is the opportunity cost of producing one more unit of one good (so it’s the marginal cost) measured by the amount of the other good you have to give up . Typically, the higher the current production, the higher the opportunity cost. The higher the current production, the more additional resources you have to use to get just one more unit. So more resource is taken away from other goods and so you have to give up more of them. So the marginal cost is typically upward sloping. This is visually related to the shapes of the PPF: The PPF is downward sloping and “bowed out” away from the origin. [ ] Using Resources Efficiently The PPF shows you what can be produced, and what tradeoff you’d have to make among goods and services. But the PPF does not tell you which combination of goods and services you should produce (choose). That depends on your preference (your taste) . Your preference tells you what tradeoff you are willing to make : how much water would you be willing to give up in order to get one more pound of fish?
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