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# Ch02 - Chapter 2 The Economic Problem Outline I Production...

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C h a p t e r 2 : T h e E c o n o m i c P r o b l e m O u t l i n e I. Production Possibilities and Opportunity Cost A. Production Possibilities Frontier 1. The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot ( ceteris paribus ). 2. The PPF in Figure 2.1 shows the combinations of “CDs” and “pizza” (standing for any pair of goods and services) that can be produced ceteris paribus . 3. Points inside and on the frontier are attainable and points outside the frontier are unattainable. B. Production Efficiency 1. We achieve production efficiency if we cannot produce more of one good without producing less of some other good. 2. Points on the frontier utilize all the available resources and are production efficient. 3. Any point inside the frontier, such as point Z , is inefficient because at such a point it is possible to produce more of one good without producing less of the other good. At Z, resources are either unemployed or misallocated . C. Tradeoff Along the PPF 1. When we operate efficiently along the PPF , we face a tradeoff because we must give up something to get more of something else. D. Opportunity Cost 1. The opportunity cost of an action is the highest-valued alternative forgone. Moving along the PPF has an opportunity cost. a) As we move along the PPF and produce more pizza (for example a move from C to D in Figure 2.1), the opportunity cost of the additional pizzas is the decrease in CD production. The production of CDs decreases from 12 million to 9 million, a decrease of 3 million; the production of pizza increases from 2 million to 3 million, an increase of 1 million. So the opportunity cost of a pizza is 3 million CDs/1 million pizzas or 3 CDs per pizza. b) As we move along the PPF in the and produce more CDs (for example a move from D to C in Figure 2.1), the opportunity cost of the additional CDs is the decrease in pizza production. The production of pizza decreases from 3 million to 2 million, a decrease of 1 million; the production of CDs increases from 9 million to 12 million, an increase of 3 million. So the opportunity cost of a CD is 1 million pizza/3 million CDs or 1/3 of a pizza per CD. 2.

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Ch02 - Chapter 2 The Economic Problem Outline I Production...

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