econ 140-ch2-.ppt - CHAPTER 2 THE ECONOMIC PROBLEM Parkin\"Economics Adapted by Dr Anis Khayati 1 Production Possibilities Frontier The production

econ 140-ch2-.ppt - CHAPTER 2 THE ECONOMIC PROBLEM...

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CHAPTER 2 THE ECONOMIC PROBLEM Parkin "Economics". Adapted by Dr. Anis Khayati 1
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2 Production Possibilities Frontier The production possibilities frontier ( PPF ) using it to 1. illustrate the concepts of scarcity, tradeoff and opportunity cost . 2. explain, the concepts of marginal cost and marginal benefit , introduce efficiency , and 3. explain how we can expand production by accumulating capital and improving technology. Thus, the economic problem of allocating resources (making choices) in a situation of scarcity can be illustrated by explaining the concept of the production possibilities frontier (PPF). Parkin "Economics". Adapted by Dr. Anis Khayati
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3 Production Possibilities and Opportunity Cost The PPF model is a graphical illustration with the following assumptions: 1. The society has a fixed amount of available resources and technology. 2. Full employment of resources. 3. The choice is between producing two goods: ( CDs ) and ( Pizzas ). Parkin "Economics". Adapted by Dr. Anis Khayati EXAMPLE: The following table summarizes hypothetical choices, or production possibilities that we confront. See the production possibilities schedule….
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4 Production Possibilities and Opportunity Cost Parkin "Economics". Adapted by Dr. Anis Khayati Possibility Piz CDs A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0
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5 Production Possibilities and Opportunity Cost The PPF illustrates Scarcity : Points inside and on the frontier, such as points A , B , C , D , E , F , and Z are attainable. Points outside the frontier are unattainable. Parkin "Economics". Adapted by Dr. Anis Khayati
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6 Production Possibilities and Opportunity Cost The PPF illustrates Production Efficiency : We achieve production efficiency if we cannot produce more of one good without producing less of some other good. Points on the frontier are efficient . Parkin "Economics". Adapted by Dr. Anis Khayati
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7 Production Possibilities and Opportunity Cost Any point inside the frontier, such as point Z , is inefficient . At such a point it is possible to produce more of one good without producing less of the other good.
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