chaptertwo - Ch. 2 The Economic Problem Production...

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Ch. 2 The Economic Problem Production Possibilities and Opportunity Cost - Production possibilities frontier (PPF) : the boundary between those that cannot. - Focus on two goods at a time and hold the quantities produced of all the other goods and services constant (model economy and ceteris paribus ) - Production Possibilities Frontier o The PPF illustrates scarcity because we cannot attain the points outside the frontier. They are points that describe wants that can’t be satisfied. We can produce at all the points inside the PPF and on the PPF. - Production Efficiency: when we cannot produce more of one good without producing less of some other good. o When production is efficient, we are at a point on the PPF. If we are at a point inside, production is inefficient because we have some unused resources or misallocated resources or both. Resources are unused when they are idle but could be working. Resources are misallocated when they are assigned to tasks for which they are not the best match. o Along the PPF, we face a tradeoff. - Tradeoff Along the PPF o At any given point in time, we have a fixed amount of labor, land, capital, and entrepreneurship. By using our available technologies, we can employ these resources to produce goods and services. But we are limited in what we can produce. This limit defines a boundary between what we can attain and what we cannot attain. This boundary represents the real-world’s PPF. - Opportunity Cost: highest-valued alternative forgone o Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. Therefore, the opportunity cost of producing an additional CD is equal to the inverse of the opportunity cost of producing an additional pizza. - Increasing Opportunity Cost o The phenomenon of increasing opportunity cost is reflected in the shape of the PPF – it is bowed outward. o The PPF is bowed outward because resources are not all equally productive in all activities. The more of either good we try to produce, the less productive are the additional resources we use to produce that good and the larger is the opportunity cost of a unit of that good. o PPF can be linear when workers have similar skills, so that if he reallocates them from one activity to another, he faces a constant opportunity cost. Using Resources Efficiently - The PPF and the Marginal Cost o The limits to production, which are summarized by the PPF, determine the marginal cost of each good or service. o
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This note was uploaded on 02/17/2008 for the course ECON 51 taught by Professor Leachman during the Spring '08 term at Duke.

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chaptertwo - Ch. 2 The Economic Problem Production...

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