Opportunity Cost and Production Possibility Frontiers

These flashcards cover the key concepts of opportunity cost and production possibility frontiers from the lecture notes.

Opportunity Cost

The cost of the alternative use of resources in economics, which can be expressed in terms of money or time.

Production Possibility Frontier (PPF)

A graphical representation of all possible combinations of the production of two goods or services that an economy can produce.

PPF Assumptions

1. The economy produces only two goods. 2. The state of technology is constant. 3. The quantity of resources available remains unchanged. 4. All resources are fully employed.

Full Capacity

All points on the PPF represent situations where the economy is operating at full capacity.

Opportunity Cost Calculation

The opportunity cost can be calculated as the ratio of what you have forgone to what you gain.

Technological Progress

Improvements that allow for more efficient production methods, resulting in an outward shift of the PPF.

Unemployment and PPF

Unemployment does not change the PPF itself, but the position of production relative to the frontier.

Concave PPF

A PPF shape indicating that resources may not be perfectly substitutable, showing diminishing returns.

Trade Off in Economic Growth

In the short-run, producing more capital goods reduces consumer goods output, affecting standards of living.

Maximizing Satisfaction

Efficient allocation of resources aiming for maximum satisfaction of wants at minimum opportunity cost.