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THE ECONOMIC PROBLEM (Production Possibilities and Opportunity Cost…
THE ECONOMIC PROBLEM
Production Possibilities
and Opportunity Cost
Production Possibilities Frontier
cola and pizza shows the limits to the production
Production Efficiency
we produce goods
and services at the lowest possible cost
Tradeoff Along the PPF
A choice along the PPF involves a tradeof
Opportunity Cost
Increasing Opportunity Cost
Opportunity cost is a
ratio. It is the decrease in the quantity produced
Opportunity Cost Is a Ratio
he opportunity cost of a pizza increases as the quantity of pizzas produced ncreases.
Using Resources Efficiently
The PPF and Marginal Cost
The marginal cost of a good is the opportunity cost of
producing one more unit of it.
Preferences and Marginal Benefit
The marginal benefit from a good or service is the benefit received from consuming one more unit of
it.
Allocative Efficiency
At any point on the PPF , we cannot produce more
of one good without giving up some other good
The Cost of Economic Growth
Economic growth comes from technological change
and capital accumulation.
Technological change
the development of new goods
and of better ways of producing
goods and services
Capital accumulation
the growth of capital resources, including human capital
Gains from Trade
Comparative Advantage
and Absolute Advantage
a comparative advantage
an activity if that person can perform the activity at
a lower opportunity cost than anyone else.
Absolute advantage
A person who is more productive than others