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Understanding Opportunity Cost Suppose Kobe Bryant owns a big house right here in Orange County and he needs someone to mow the lawn every week. He could do it – it takes him 2 hours to finish the job. He could ask his neighbor’s teenaged son (John) to do it. It will take John 4 hours to finish the job. Should Kobe hire John to mow the lawn?
Understanding Opportunity Cost Now let’s say Kobe’s opportunity cost is \$10,000/ hour. Jon’s opportunity cost is \$15/hour. What’s your answer now?

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The Production Possibilities Frontier The Production Possibilities Frontier (PPF) : a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology Example: Two goods: computers and wheat One resource: labor (measured in hours) Economy has 50,000 labor hours per month available for production. 0
PPF Example Producing one computer requires 100 hours labor. Producing one ton of wheat requires 10 hours labor. 5,000 0 4,000 100 2,500 250 1,000 400 50,000 0 40,000 10,000 25,000 25,000 10,000 40,000 0 500 0 50,000 E D C B A Wheat Computers Wheat Computers Production Employment of labor hours 0

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Point on graph Production Com- puters Wheat A 500 0 B 400 1,000 C 250 2,500 D 100 4,000 E 0 5,000 A B C D E PPF Example
A. On the graph, find the point that represents (100 computers, 3000 tons of wheat), label it F . Would it be possible for the economy to produce this combination of the two goods? Why or why not? B. Next, find the point that represents (300 computers, 3500 tons of wheat), label it G . Would it be possible for the economy to produce this combination of the two goods? Points off the PPF Points off the PPF 7

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Answers Answers 8 Point F : 100 computers, 3000 tons wheat Point F requires 40,000 hours of labor. Possible but not efficient: could get more of either good w/o sacrificing any of the other. 0 1,000 2,000 3,000 4,000 5,000 6,000 0 100 200 300 400 500 600 Computers Wheat (tons) F
Answers Answers 9 0 1,000 2,000 3,000 4,000 5,000 6,000 0 100 200 300 400 500 600 Computers Wheat (tons) Point G : 300 computers, 3500 tons wheat Point G requires 65,000 hours of labor. Not possible because economy only has 50,000 hours. G

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The PPF:  What We Know So Far Points on the PPF (like A E ) possible efficient: all resources are fully utilized Points under the PPF (like F ) possible not efficient: some resources underutilized ( e.g., workers unemployed, factories idle) Points above the PPF (like G ) not possible
The PPF and Opportunity Cost Recall: The opportunity cost of an item is what must be given up to obtain that item.

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