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Chapter 2

Economics 1021A Chapter 2


Department
Economics
Course Code
ECON 1021A/B
Professor
Terry Biggs
Chapter
2

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Economics 1021 Chapter 2 2013-09-24
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 (ceteris paribus).
The PPF determines opportunity cost.
We achieve production efficiency if we cannot produce more of one good without producing less of
some other good.
Points on the frontier are efficient.
Any point inside the frontier is inefficient.
At such a point, it is possible to produce more of one good without producing less of the other good.
At such a point, some resources are either unemployed or misallocated.
Every choice along the PPF involves a tradeoff.
Because resources are not equally productive in all activities, the PPF bows outward.
The outward bow of the PPF means that as the quantity produced of each good increases, so does its
opportunity cost.
The marginal cost of a good or service is the opportunity cost of producing one more unit of it.
Preferences are a description of a person’s likes and dislikes.
To describe preferences, economists use the concepts of marginal benefit and the marginal benefit curve.
The marginal benefit of a good or service is the benefit received from consuming one more unit of it.
We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good
or service.
The more we have of any good, the smaller is its marginal benefit and the less we are willing to pay for an
additional unit of it. We call this general principle the principle of decreasing marginal benefit.
The marginal benefit curve shows the relationship between the marginal benefit of a good and the
quantity of that good consumed.
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