production-prob-notes

production-prob-notes - 1 Notes: Production Possibilities...

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1 Notes: Production Possibilities Production Possibility Curve To clarify some confusion that exists in distinguishing between increasing, decreasing, and constant opportunity costs, the examples which follow are offered. Case 1: Increasing Opportunity Costs Production Alternatives Product A B C D Good X 9 8 5 0 Good Y 0 3 6 8 Good X A 9 B 7 5 C PPC 3 1 D 0 1 2 3 4 5 6 7 8 9 10 Good Y On the diagram above, if we read the curve backwards, that is, from D L A , note the following: Move D L C give up 2 Good Y to gain 5 Good X (or 2/5 Y to gain 1X). Move C L B give up 3 Good Y to gain 3 Good X (or 1Y to gain 1X). Move B L A give up 3 Good Y to gain 1 Good X (or 3Y to gain 1X). The law of increasing opportunity costs is demonstrated in the move from D L A . This time to gain equivalent units of Good X increase amounts of Y must be given up. Thus, the “bowed-out” or concave, shape of the production possibility curve illustrates increasing costs. Note:
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production-prob-notes - 1 Notes: Production Possibilities...

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