Nature of Economics- 2. Opportunity Cost & the Production Possibility Frontier (PPF)

Opportunity Cost

The cost of the alternative foregone by present consumption of goods and services.

Production Possibility Frontier (PPF)

A graph depicting all possible combinations of two goods or services that can be produced at a given time.

Maximum Capacity on PPF

It shows what an economy can produce when resources are fully employed.

Inefficiency on PPF

Points inside or below the curve indicate that resources are not fully employed.

Opportunity Cost calculation from Point A to Point B

To produce an additional 50 units of Food, 50 units of Cars must be sacrificed, resulting in an opportunity cost of 1 Car.

Opportunity Cost calculation from Point B to Point A

To produce an additional 50 units of Cars, 50 units of Food must be sacrificed, resulting in an opportunity cost of 1 Food.

Impact of Technology on PPF

An improvement in technology can shift the PPF outward, allowing for more goods to be produced with the same resources.

Effect of New Resources on PPF

An increase in the number of workers can shift the PPF outward, indicating economic growth.

Effect of Resource Destruction on PPF

Destruction of resources shifts the PPF inward, indicating a recession.

Shape of PPF

Due to the complexity of reality, the PPF is never a straight line; it is usually concave.