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Chapter 2

Chapter 2 - ECON 1000

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York University
ECON 1000
Sam Lanfranco

Chapter 2 The Economic ProblemOctober11111200 PMProduction Possibilities and Opportunity CostIf you want to increase production of one good you must decrease production of something elseThe production possibilities frontieris the boundary between combinations of goods and services that can be produced and those that cannotPPF focuses on two goods at a time and hold quantities produced of all other goods and services constantIt is a model economy where everything remains the same except for production of two goods we are consideringProduction Possibilities FrontierThe PPF for cola and pizza show limits to production of these two goods given total resources and technologiesPPF illustrates scarcity because we cannot attain points outside of frontierCan only produce points inside the PPF or on the PPFGraph also shows you can stop producing one good and move it to people to produce another goodProduction EfficiencyAchieved if goods and services are made at lowest possible costOccurs at points onthe PPFIf inside the PPF it is inefficient because too much is given up to produce a certain goodThis means resources are unused or misallocated or bothUnused idle but could be workingMisallocated assigned to tasks for which they are not best matchedSkilled pizza chefs to work in cola and skilled cola to work in pizzaTradeoff Along PPFEvery choice alongPPF involves tradeoffWe have a set amount of labour land capital and entrepreneurship and can produce goods and services but we are limited in what we can produceLimit defines boundary between what we can attain and what we cannotBoundary is the real worlds production possibilities frontier and defines tradeoffs we must makeTradeoffs involve a cost an opportunity costOpportunity CostOpportunity cost of an action is highestvalued alternative forgonePPF allows you to calculate opportunity costOnly two goods so there is only one alternative forgoneOpportunity cost of producing an additional pizza is the cola we mustforgoOpportunity cost of producing an additional cola is the pizza we must forgoMove from one point to anotherIf you get X more pizza but Y fewer cans of cola that means one pizza costs YX cans of colaOpportunity cost is a ratioDecrease in quantity produced of one good divided
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