Production Possibilities

Opportunity Cost When an activity is chosen, the opportunity cost is the benefit expected from the best alternative forgone Example: If you choose to attend college this year, your opportunity cost is the salary you would have received from the best available full-time job.

Production Possibilities The production possibilities frontier is a curve showing all alternative combinations of goods that can be produced when available resources are used fully and efficiently Efficiency exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good

The Economy’s Production Possibilities Frontier Beer Unattainable (without Trade) The law of increasing opportunity cost makes the production possibilities frontier concave (bowed-out) Inefficient Pizza

The Law of Increasing Costs Beer 8 A The law of increasing opportunity cost makes the production possibilities frontier concave (bowed-out) 6 B 4 4 6 8 Pizza

Shifts in the PPF (Determinants) Changes in Resources Changes in the Capital Stock Human Capital Physical Capital Technological Changes

An Increase in Resources Beer An increase in resources will cause the production possibilities frontier to shift Pizza

A Technological Change Technological improvement in the production of one good will cause the production possibilities frontier to rotate Beer Pizza