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Production possibilities and opportunity costs

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Intros
Lessons
  1. Production Possibilities and Opportunity Costs Overview:
  2. Production Possibilities Frontier
    • All possible choices of production
    • Limits to the production of two goods
    • Key Ideas
    • Production efficiency and product inefficient
  3. Opportunity Cost
    • Something that must be given up to acquire something else
    • Opportunity Cost as a Ratio
    • Examples
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Examples
Lessons
  1. Understanding Production Possibilities Frontier
    Suppose a business can produce pops and bananas. The business' production possibilities are as follows

    Pops (per day)

    Bananas (per day)

    18

    0

    15

    1

    11

    2

    6

    3

    0

    4

    1. Draw the business' PPF
    2. If the business can produce 11 pops per day, then how much bananas does it need to produce per day to achieve production efficiency?
    3. What production of pops and bananas would be considered product inefficient?
    4. If the business is currently producing 3 bananas per day and 6 pops per day, then what is the trade off to attain another banana?
  2. Suppose a business can produce cars and tires. The business' production possibilities are as follows

    Cars (per day)

    Tires (per day)

    0

    34

    2

    27

    4

    19

    6

    10

    8

    0

    1. Draw the business' PPF
    2. If the business can produce 2 cars per day, then how much tires does it need to produce per day to achieve production efficiency?
    3. What production of cars and tires would be considered product inefficient?
    4. What production of cars and tires would be unattainable?
  3. Calculating Opportunity Cost
    Recall that the business' production possibilities are as follows:

    Cars (per day)

    Tires (per day)

    0

    34

    2

    27

    4

    19

    6

    10

    8

    0

    1. Suppose the business decides to increase the production of cars from 4 to 6 each day. What is the opportunity cost of an additional car?
    2. Suppose the business decides to increase the production of tires from 10 to 19 each day. What is the opportunity cost of an additional tire?
    3. What the relationship between questions a and b?
    4. Is there an increasing opportunity cost of cars? Explain
Topic Notes
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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.