Chapter 2 - Chapter 2: The Economic Problem I. Production...

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Chapter 2: The Economic Problem I. Production Possibilities and Opportunity Cost a. Production possibilities frontier (PPF)-the boundary between those combinations of goods and services that can be produced and those that cannot b. We look at a model economy in which everything remains the same except for the production of the two goods we are considering c. Production Possibilities Frontier c.i. Illustrates scarcity because we cannot attain all points outside the PPF c.ii. We can produce at any point inside the PPF or on the PPF d. Production Efficiency-achieved if we produce goods and services at the lowest possible cost d.i. Outcome occurs at all point ON the PPF d.ii. Points INSIDE the PPF is where production is inefficient because we are giving up more than necessary of one good to produce a given quantity of the other goods d.iii. Only when we produce on the PPF do we incur the lowest possible cost of production d.iv. Production is inefficient inside the PPF because resources are either unused or misallocated e. Tradeoff Along the PPF e.i. We can produce more of any one goods or service only if we produce less of some other goods or services e.ii. All tradeoffs involve a cost—opportunity cost f. Opportunity Cost-the highest valued alternative forgone f.i. Opportunity Cost Is a Ratio f.i.1. It is the 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
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This note was uploaded on 11/14/2011 for the course ECO 201 taught by Professor Dunlevy during the Fall '08 term at Miami University.

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Chapter 2 - Chapter 2: The Economic Problem I. Production...

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