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Chapter 2- Choices and trade offs in the markets.docx

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Monash University
Philip Grossman

Chapter 2 PRODUCTION POSSIBILTY FRONTIERS AND REAL-WORLD TRADE-OFFS Production possibility a curve showing the maximum attainable combinations of two products that may be produced with available resources.  All combinations either on the frontier or inside the frontier attainable resources available  Combinations on the frontier are efficient because all available resources are being  fully utilised and the fewest possible resources are being used to produce a given amount of output.  Combinations inside the frontier are – inefficient because maximum output is not being obtained from the available resources INCREASING MARGINAL OPPORTUNITY COSTS As the economy moves down the production possibility frontier it experiences increasing marginal opportunity costs because increasing OBJECT B a production by given quantity requires larger and larger decreases OBJECT A. Why does marginal opportunity cost occur? Marginal opportunity costs occur because some workers, machines and other resources are better suited to one use than another. What is the idea of marginal opportunity costs and why is it beneficial? The idea of marginal opportunity costs is an important economic concept. It demonstrates that the more resources devoted to an activity, the smaller the payoff to devoting additional resources to that activity.  Example- the more funds a firm has devoted to research and development during a given year, the smaller the amount of useful knowledge it receives from each additional dollar-the greater the opportunity costs of using the funds in that way. ECONOMIC GROWTH At any given time the total resources available to any economy are fixed. If Australia produces more computers
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