ECON 1000 Lecture Notes - Capital Accumulation, Ceteris Paribus, Marginal Utility
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Chapter 2
Production Possibilities and Opportunity Cost
•The production possibilities frontier (PPF ) is the boundary between those combinations
of goods and services that can be produced and those that cannot.
•To illustrate the PPF , we focus on two goods at a time and hold the quantities of all other
goods and services constant.
•That is, we look at a model economy in which everything remains the same (ceteris
paribus ) except the two goods we’re considering.
•Any point in or on the boundary, it means it is possible for the company to produce.
•The reason why PPF has a negative slope is because when you want to produce one good,
the produce of another good has to be decrease.
•We achieve production efficiency if we cannot produce more of one good without
producing less of some other good. The point that is inside the boundary is not efficient,
but the point on the line is efficient. The original point is the least efficient.
•Every choice along the PPF involves a tradeoff . PPE is not a straight line because the
produce speed is not equal. The opportunity cost is increasing.
•Opportunity Cost is the decrease in the quantity produced of one good divided by the
increase in quantity produced of another good once we move along the production
possibilities frontier.
Using Resources Efficiently
•The marginal cost of a good or service is the opportunity cost of producing one more
unit. But opportunity cost is what to give up in order to produce something. (marginal cost
is one unit of the opportunity cost.)
•depend on the demand(marginal cost and marginal benefit), we choose the best point
•The slope is the opportunity cost. The PPF determines opp cost.
•Opportunity cost = decrease in good A / increase in good B
•the point of allocate efficiency
•the reference and the cost keeps changing (PPF shafts all the time)
Economic Growth
•The expansion of production possibilities—and increase in the standard of living—is called
economic growth.
•Two key factors influence economic growth: Technological change and Capital
accumulation.
•Technological change is the development of new goods and of better ways of producing
goods and services.
•Capital accumulation is the growth of capital resources, which includes human capital.
The Cost of Economic Growth
•To use resources in research and development and to produce new capital, we must decrease
our production of consumption goods and services.
•So economic growth is not free.
•The opportunity cost of economic growth is less current consumption.