Ch02 - Chapter 2: The Economic Problem Objectives: Define...

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Chapter 2: The Economic Problem Objectives: Define the production possibilities frontier and calculate opportunity cost Distinguish between production possibilities and preferences and describe an efficient allocation of resources Explain how current production choices expand future production possibilities Explain how specialization and trade expand our production possibilities Describe the economic institutions that coordinate decisions
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Production Possibilities and Opportunity Cost Production possibilities frontier ( PPF ): the boundary between those combinations of goods and services that can be produced and those that cannot. We focus on two goods at a time and hold the quantities of all other goods and services constant ( ceteris paribus ).
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Production Possibilities and Opportunity Cost Production Possibilities Frontier Figure 2.1 shows the PPF for two goods: CDs and pizza (could be any two goods). Any point on the frontier such as E and any point inside the PPF such as Z are attainable. Points outside the PPF are unattainable.
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Production Possibilities and Opportunity Cost Production Efficiency We achieve production efficiency if we cannot produce more of one good without producing less of some other good. Points on the frontier are efficient .
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Production Possibilities and Opportunity Cost Any point inside the frontier, such as Z , is inefficient . 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.
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Production Possibilities and Opportunity Cost Tradeoff Along the PPF Every choice along the PPF involves a tradeoff . On this PPF, we must give up some CDs to get more pizzas or give up some pizzas to get more CDs.
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Production Possibilities and Opportunity Cost Opportunity Cost As we move down along the PPF, we produce more pizzas but the quantity of CDs we can produce decreases. The opportunity cost of a pizza is the CDs forgone.
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Production Possibilities and Opportunity Cost In moving from E to F, the quantity of pizzas produced increases by 1 million. The quantity of CDs produced decreases by 5 million. The opportunity cost of producing the fifth 1 million pizzas is 5 million CDs. One of these pizzas costs
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Production Possibilities and Opportunity Cost In moving from F to E , the quantity of CDs produced increases by 5 million. The quantity of pizzas produced decreases by 1 million. The opportunity cost of the first 5 million CDs is 1 million pizzas. One of these CDs costs 1/5 of a pizza.
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Production Possibilities and Opportunity Cost The opportunity cost of a CD is the inverse of the opportunity cost of a pizza.
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Ch02 - Chapter 2: The Economic Problem Objectives: Define...

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