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Unformatted text preview: Chapter 2 The Economic Problem Production Possibilities and Opportunity Cost The production possibilities frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. The figure below shows the production possibilities frontier for guns and butter. Possibility Butter (tonnes) Guns (units) A 0 and 15 B 1 and 14 C 2 and 12 D 3 and 9 E 4 and 5 F 5 and 0 The table lists some combinations of the quantities of butter and guns that can be produced in a month given the resources available. 1 The dots marked A , B , C , D , E , and F on the PPF correspond to the 6 combinations in the table. If we stop producing butter and move all the people who produce butter into producing guns, we produce at point A . If we stop producing guns and move all the people who produce guns into producing butter, we produce at point F . We can produce at any point on the PPF on the blue lineor inside the PPF in the orange area. We cannot produce at any point outside the PPF. We achieve production efficiency if we cannot produce more of one good without producing less of some other good. Production efficiency occurs at all points on the PPF . Possible production points inside the PPF such as point Z are inefficient. The opportunity cost of an action is the highest-valued alternative forgone. If we move from point C to point D , we must give up 3 units of guns to produce 1 more tonne of butter. The additional tonne of butter costs 3 units of guns. 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 the other good as we move along the production possibilities frontier. The PPF reflects increasing opportunity cost. When a large quantity of guns and a small quantity of butter are producedfor example between points A and B the frontier has a gentle slope and a given increase in the quantity of butter costs a small decrease in the quantity of guns....
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