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1-Production Possibilities Frontier

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181 views

1-Production Possibilities Frontier

Uploaded by

95
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Production Possibilities Frontier

PPF represents all possible choices of production for a business, or an economy. The PPF
shows the limits to the production of two specific goods, when given the available resources
and technology.

Production Efficiency: Is achieved when the production of goods and services are at the
lowest possible cost.

Key ideas to note in a PPF:


1. There is always a tradeoff along the PPF. (Opportunity Cost)
2. Points outside the curve are unattainable.
3. We achieve production efficiency when the point is on the curve
4. When a point is inside the curve, this is product inefficient.

Opportunity Cost: is the benefit, profit, or value of something that must be given up to
acquire something else.
Note: Opportunity Cost is a ratio between the decrease in quantity of a good and an increase
in quantity of another good along the PPF.

Questions:

1. Understanding Production Possibilities Frontier


Suppose a business can produce pops and bananas. The business' production
possibilities are as follows

Pops (per day) Bananas (per day)


18 0
15 1
11 2
6 3
0 4

a. Draw the business' PPF


b. If the business can produce 11 pops per day, then how much bananas
does it need to produce per day to achieve production efficiency?
c. What production of pops and bananas would be considered product
inefficient?
d. If the business is currently producing 3 bananas per day and 6 pops per
day, then what is the trade off to attain another banana?
2. Suppose a business can produce cars and tires. The business' production possibilities
are as follows

Cars (per
Tires (per day)
day)
0 34
2 27
4 19
6 10
8 0
a. Draw the business' PPF
b. If the business can produce 2 cars per day, then how much tires does it
need to produce per day to achieve production efficiency?
c. What production of cars and tires would be considered product
inefficient?
d. What production of cars and tires would be unattainable?
3. Calculating Opportunity Cost
Recall that the business' production possibilities are as follows:

Cars (per
Tires (per day)
day)
0 34
2 27
4 19
6 10
8 0

a. Suppose the business decides to increase the production of cars from 4


to 6 each day. What is the opportunity cost of an additional car?
b. Suppose the business decides to increase the production of tires from
10 to 19 each day. What is the opportunity cost of an additional tire?
c. What the relationship between questions a and b?
d. Is there an increasing opportunity cost of cars? Explain

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