Lecture 3

# Lecture 3 - roadster What if the production possibilities...

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1/16/09 PPF – combination of products you can produce using the resources available There’s a trade off, if you produce more on good A then you produce less of good B. Things within the PPF are attainable. Unless they are exactly on the PPF line though, it is not efficient. Opportunity costs: Q.) how many roadsters must BMW give up in order to get 100 more SUVs? 100 if working at maximum efficiency Opportunity cost is the highest valued alternative that must be given up to engage in an activity (value of next best alternative). It is measured as a ratio: change in what you must give up / change in what you get. Q.) -100 roadsters / 100 SUVs = -1 (the slope) absolute value = 1 Absolute value of the slope of PPF is the opportunity cost of the good on x axis as measured in units of goods on the y axis. Therefore the op. cost of an SUV is one
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Unformatted text preview: roadster. What if the production possibilities frontier changes to: Roadsters = -2*SUVs + 800 ? What is the opportunity cost of an SUV? 2 roadster |(change in roadsters / change in SUV)| What is the opportunity cost of a roadster? ½ SUVs |(change in SUV / change in roadsters)| The good on the x axis is the slope so the op cost of the good on the y axis is the reciprocal. Opportunity cost of a cell phone: the op cost of a cell phone = the decrease in quantity of DVDs / the increase in # cell phones along PPF. The op cost increases as more of the other good is produced in a curved line PPF Curved line implies some workers are good at making one product & bad at making another....
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