Production possibilities and opportunity costs - Problems of Economics

Production possibilities and opportunity costs



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.

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Production possibilities and opportunity costs

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