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Nature of Economics- 2. Opportunity Cost & the Production Possibility Frontier (PPF)
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1
Opportunity Cost
The cost of the alternative foregone by present consumption of goods and services.
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2
Production Possibility Frontier (PPF)
A graph depicting all possible combinations of two goods or services that can be produced at a given time.
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3
Maximum Capacity on PPF
It shows what an economy can produce when resources are fully employed.
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4
Inefficiency on PPF
Points inside or below the curve indicate that resources are not fully employed.
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5
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.
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6
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.
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7
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.
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8
Effect of New Resources on PPF
An increase in the number of workers can shift the PPF outward, indicating economic growth.
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9
Effect of Resource Destruction on PPF
Destruction of resources shifts the PPF inward, indicating a recession.
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10
Shape of PPF
Due to the complexity of reality, the PPF is never a straight line; it is usually concave.
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