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Chapter 2

ECON101 Chapter Notes - Chapter 2: Marginal Utility, Marginal Cost, Opportunity Cost

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Shi Lei Niu

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The Economic Problem
Production Possibilities and Opportunity Cost
The production possibilities frontier (PPF) is the boundary between the combinations of goods
and services that can be produced and the ones that cannot
Production Possibilities Frontier
- PPF illustrates scarcity because we cannot attain points outside the frontier
- We can produce all points inside the PPF and on the PPF
Production Efficiency
- We achieve product efficiency if we cannot produce more of one good without
producing less of some other good
- When production is efficient, we are at a point on the PPF
- If we are at a point inside the PPF, production is inefficient
Tradeoff Along the PFF
- Every choice along the PPF involves a tradeoff
- At any point in given time, we have fixed amount of labour, land, capital and
entrepreneurship. By using available technologies, we can employ resources to produce
goods and services
- Limit in what we can produce defines a boundary between what we can attain and what
we cannot attain real world’s production possibilities frontier – it defines what
tradeoff we must make
- All tradeoffs involve a cost an opportunity cost
Opportunity Cost
- The opportunity cost of an action is the highest-valued alternative forgone
- PPF helps us to make the concept of opportunity cost precise and enables us to calculate
- Along the PPF, there are only two goods, so there is one alternative forgone: some
quantity of the other good
- Opportunity cost is a ratio it is the decrease in quantity produce of one good divided
by increase of the quantity produced of another good as we move along the PPF
- Producing additional is equal to inverse of opportunity cost of producing an additional
alternative good
- Opportunity cost increases as quantity increases
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
- Calculate marginal cost from the slope of the PPF
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