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Unformatted text preview: 2 The Economic Problem 2010 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 o Illustrates scarcity because we CANNOT attain points outside of the frontier, these points describe wants that cannot be satisfied o We can produce at any point inside (not efficient) or on (efficient) the frontier- Production efficiency o Production efficiency is achieved if we produce goods and services at the lowest possible opportunity cost At any point inside the PPF it is inefficient because were giving up more goods than necessary to produce the other good This is because the resources are either misallocated (assigned to tasks for which they are not the best match..ie. pepsi maker making pizza) or unused (idle but can be working)- Tradeoff Along the PPF o Every choice along the PPF involves a tradeoff We are limited in producing goods and services because there is a set amount of factors of production (labour, land, capital and entrepreneurship) we have We can only produce more of something if we produce less of something else- Opportunity Cost o Recall: opportunity cost is the highest valued alternative forgone o Because there are only 2 goods/services on the PPF, the only alternative forgone for increase of production in the other is the one the other.. thereby being the opportunity cost o Opportunity cost is a ratio.. it is a decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the PPF The opportunity cost of the other good is the inverse of ^ o Increasing opportunity cost Bowed out shape of the PPF reflects increasing opportunity cost...
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This note was uploaded on 11/07/2010 for the course ECON econ101 taught by Professor Trimarchi during the Fall '09 term at Waterloo.
- Fall '09