Scribd
Upload
10 views18 pages

Lecture 2 - 2022

Uploaded by

youssefahmednashaat37
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
10 views18 pages

Lecture 2 - 2022

Uploaded by

youssefahmednashaat37
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 18

2 THE ECONOMIC PROBLEM

Production Possibilities and


Opportunity Cost

•The production possibilities frontier (PPF) is the boundary


between those combinations of goods and services that
can be produced and those that cannot.
•To illustrate the PPF, we focus on two goods at a time and
hold the quantities of all other goods and services
constant.
•That is, we look at a model economy in which everything
remains the same (ceteris paribus) except the two goods
we’re considering.
Production Possibilities and
Opportunity Cost

•Production Possibilities Frontier


•Figure 2.1 shows the PPF for two goods: cola and pizzas.
Production Possibilities and
Opportunity Cost

•Any point on the frontier such as E and any point inside the
PPF such as Z are attainable.
•Points outside the PPF are unattainable.
Production Possibilities and
Opportunity Cost

•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.
Production Possibilities and
Opportunity Cost

•Any point inside the


frontier, such as Z, is
inefficient.
•At such a point, it is
possible to produce
more of one good
without producing less
of the other good.
•At Z, resources are
either unemployed or
misallocated.
Production Possibilities and
Opportunity Cost

•Tradeoff Along the PPF


•Every choice along the
PPF involves a tradeoff.
•On this PPF, we must
give up some cola to get
more pizzas or give up
some pizzas to get more
cola.
Production Possibilities and
Opportunity Cost

• Opportunity Cost
•As we move down
along the PPF,
•we produce more
pizzas, but the quantity
of cola we can produce
decreases.
•The opportunity cost of
a pizza is the cola
forgone.
Production Possibilities and
Opportunity Cost
•In moving from E to F:
•The quantity of pizzas
increases by 1 million.
•The quantity of cola
decreases by 5 million
cans.
•The opportunity cost of
the fifth 1 million pizzas
is
5 million cans of cola.
•One of these pizzas
costs 5 cans of cola.
Production Possibilities and
Opportunity Cost
•In moving from F to E:
•The quantity of cola
increases by 5 million
cans.
•The quantity of pizzas
decreases by 1 million.
•The opportunity cost of
the first 5 million cans
of cola is 1 million
pizzas.
•One of these cans of
cola costs 1/5 of a pizza.
Production Possibilities and
Opportunity Cost
•Opportunity Cost Is a
Ratio
•Note that the
opportunity cost of a
can of cola is the inverse
of the opportunity cost
of a pizza.
•One pizza costs 5 cans
of cola.
•One can of cola costs
1/5 of a pizza.
Production Possibilities and
Opportunity Cost
•Increasing
Opportunity Cost
•Because resources are
not equally productive
in all activities, the PPF
bows outward.
•The outward bow of
the PPF means that as
the quantity produced
of each good increases,
so does its opportunity
cost.
Shifts in the Production
Possibility Frontier
By relaxing two of the assumptions of the PPF, the Society can
produce more output if:
• Technology is improved.
• More resources are now available.

The expansion of production possibilities—and increase in the


standard of living—is called economic growth.
• The figure shows that the PPF of an economy that produces only coconuts and fish:
 Before any increase in resources, production was initially at point A. the economy was
producing 20 fish and 25 coconuts. At the current economic condition, point E is unattainable.
 The economy discovers new natural resources. This leads to economic growth. As a result, the
PPF shifts outward (upward) indicating that the economy can now produce more of both
goods.
 The new PPF passes through point E (25 fish and 30 coconuts). This means that this point is no
longer unattainable. The economy can now produce at point E.
Problem 1:

•The diagram below represents Sam’s production possibility frontier for


producing hats (H) and belts (B). Use this graph to answer the following set
of questions.
•Possibilities Belts Hats
•A 0 50
•B 50 40
•C 80 20
•D 100 0
a) Draw Sam’s PPF curve.
b) Suppose Sam is currently producing at point B. What is Sam’s
opportunity cost of producing one additional belts (from B to C)?
c) Does Sam face an increasing opportunity cost of Belt? What features of
Sam’s PPF illustrates increasing opportunity cost.
Example:
Possibilities Pepsi Chocolate
A 0 600
B 200 500
C 400 300
D 600 0
Example:

In moving from B to C:
The quantity of Pepsi increases by 200 units.
The quantity of chocolate decreases by 200 units.
The opportunity cost of the 200 Pepsi is 200 bars of chocolate.
Therefore, the opportunity cost of a can of Pepsi is given by:

You might also like