![]() For example, If Mythica produces 3m computers the opportunity cost is 5m textbooks. Interpreting PPFsįirstly, we can describe the opportunity cost to Mythica of producing a given output of computers or textbooks. The production possibility frontier (PPF) for computers and textbooks is shown here. These combinations can also be shown graphically, the result being a production possibility frontier. In fact, it can produce all the following combinations of computers and books. When it uses all of its resources, it can produce five million computers and fifty five million textbooks. Mythica, which is a hypothetical economy, produces only two goods – textbooks and computers. Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice.Ī PPF shows all the possible combinations of two goods, or two options available at one point in time. The opportunity cost of such a decision is the value of the next best alternative use of scarce resources. I think I got most of them right, but if you have any tips please let me know below.An opportunity cost will usually arise whenever an economic agent chooses between alternative ways of allocating scarce resources. Allocative inefficiency is also wasteful because we're producing too much of a good that is not being used, while we're lacking in another. The war affected Germany's PPF by making it harder to produce goods, because they lost resources. Allocative efficiency is when the combination of goods produced is exactly what a society needs.ħ. Productive efficiency is when you can't produce more of a good without decreasing the amount that another good is produced. Diminishing marginal returns happen when you exceed the optimal limit of producing a product, thus making the marginal returns drop.Ħ. And they shouldn't make a choice in it because it's inefficient and does not use all available resources.ĥ. A society cannot make a choice above (or out) of the PPF because they don't have enough resources to do so. Everything inside the curve is inefficient and everything outside is impossible.Ĥ. Because the curve shows the most efficient ways an economy can produce the products, using all the given resources. A PPF illustrates the efficient ways an economy can produce two products, with their available resources.ģ. A comparative advantage is when a country can produce a good faster and/or cheaper than another country, giving them an advantage over that good.Ģ. ![]() For this reason, the shape of the PPF from A to B is relatively flat, representing a relatively small drop-off in health and a relatively large gain in education.ġ. However, putting those marginal dollars into education, which is completely without resources at point A, can produce relatively large gains. Diverting some resources away from A to B causes relatively little reduction in health because the last few marginal dollars going into healthcare services are not producing much additional gain in health. Now imagine that some of these resources are diverted from healthcare to education, so that the economy is at point B instead of point A. ![]() ![]() People are having cosmetic surgery on every part of their bodies, but no high school or college education exists. For example, children are seeing a doctor every day, whether they are sick or not, but not attending school. This situation would be extreme and even ridiculous. At point A, all available resources are devoted to healthcare and no resources are left for education. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. ![]()
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