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Chapter Two- Economic Activities, Producing and Trading

Chapter Two- Economic Activities, Producing and Trading -...

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Hotel School of Administration HADM 1141: Microeconomics for Service Industry Cornell University Fall 2008 Chapter Two: Economic Activities: Producing and Trading  The Production Possibilities Frontier (PPF)  o A Production Possibilities Frontier represents the combination of two goods that  can be produced in a certain period of time under the conditions of a given state  of technology and fully employed resources  o The Straight-Line PPF: Constant Opportunity Costs The opportunity cost of producing one product to another is constant A straight-line PPF illustrates constant opportunity costs   o The Bowed-Outward (Concave-Downward) PPF: Increasing Opportunity Costs  A bowed-outward PPF illustrates increasing opportunity cost  The production possibilities frontier is bowed outward because the  opportunity cost of one product increases as more of it is being produced  o Law of Increasing Opportunity Cost  The shape of the production possibilities frontier depends on whether  opportunity costs: Are constant  Increase as more of a good is produced The opportunity costs increase as more of the good is produced   Law of  Increasing Opportunity Costs  This is because people have varying abilities (some people are better suited  to build houses than others are)  o Economic Concepts within a PPF Framework 
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