Production possibilities and opportunity costs

Production possibilities and opportunity costs

Lessons

Production Possibilities Frontier


PPF represents all possible choices of production for a business, or an economy. The PPF shows the limits to the production of two specific goods, when given the available resources and technology.


Production Efficiency: Is achieved when the production of goods and services are at the lowest possible cost.

PPF and marginal Cost curve


Key ideas to note in a PPF:
  1. There is always a tradeoff along the PPF. (Opportunity Cost)
  2. Points outside the curve are unattainable.
  3. We achieve production efficiency when the point is on the curve
  4. When a point is inside the curve, this is product inefficient.

Opportunity Cost: is the benefit, profit, or value of something that must be given up to acquire something else.


Note: Opportunity Cost is a ratio between the decrease in quantity of a good and an increase in quantity of another good along the PPF.

  • Introduction
    Production Possibilities and Opportunity Costs Overview:
    a)
    Production Possibilities Frontier
    • All possible choices of production
    • Limits to the production of two goods
    • Key Ideas
    • Production efficiency and product inefficient

    b)
    Opportunity Cost
    • Something that must be given up to acquire something else
    • Opportunity Cost as a Ratio
    • Examples