Production Possibilities Frontier• PPF is the boundary between those combinations of

goods and services that can be produced and those that cannot.

• Figure 2.1 shows the PPF for two goods: cola and pizzas.

Why the PPF is shaped like this?

The PPF is limited both by our available resources and by technology.

We can only produce at points inside the PPF or on the PPF.

We do not produce at point Z because we can produce more of one good without producing less of the other good, given same amount of resources.

Production Possibilities and Opportunity Cost

Which point on the PPF should we choose to produce at?

The Economics Way of Thinking

• A choice is a tradeoffA tradeoff is an exchange---- giving up one

thing to get something elseEX: The choice of going to college is a tradeoff,

because you give up…

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• All tradeoffs involves a cost----- an opportunity cost.

The opportunity cost of an action is the highest-valued alternative forgone.

EX: What is the opportunity cost of going to college?

It includes both the things you cannot afford and the time you cannot spend in order to go to college.

The Economics Way of Thinking

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20) The opportunity cost of attending college includes the cost of

A) the tuition but not the job at which you would otherwise have worked.

B) the highest valued alternative to attending college.

C) the highest valued alternative to attending college plus the cost of tuition.

D) tuition, books, and the lost wages for the hours spent studying.

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Tradeoff Along the PPF

Every choice along the PPF involves a tradeoff.

On this PPF, we must give up some cola to get more pizzas or give up some pizzas to get more cola.

That is the reason why the PPF is downward sloping!

Production Possibilities and Opportunity Cost

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Opportunity Cost

As we move down along the PPF,

we produce more pizzas, but the quantity of cola we can produce decreases.

The opportunity cost of a pizza is the cola forgone.

Production Possibilities and Opportunity Cost

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In moving from E to F:

The quantity of pizzas increases by 1 million.

The quantity of cola decreases by 5 million cans.

What is the opportunity cost of the fifth 1 million pizzas?

The opportunity cost of the fifth 1 million pizzas is 5 million cans of cola.

Production Possibilities and Opportunity Cost

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In moving from F to E:

The quantity of cola increases by 5 million cans.

The quantity of pizzas decreases by 1 million.

What is the opportunity cost of the first 5 million cans of cola ?

The opportunity cost of the first 5 million cans of cola is 1 million pizzas.

.

Production Possibilities and Opportunity Cost

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What is the opportunity cost of the first 1 million pizzas? Second? Third? Fourth? Fifth?

The opportunity cost of the first 1 million pizzas is 1 million of cans of Cola….

The opportunity cost of the fifth 1 million pizzas is 5 million cans of cola.

Production Possibilities and Opportunity Cost

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Resources are not equally suited to all different production processes.

When society produces only a small amount of pizza, it can use in pizza production those resources that are best suited to producing pizza (e.g., suitable flour, workers who have worked in Domino’s for years).

However, as society produces more and more pizza, it tends to run out of such resources. So we must absorb into pizza production those resources that are less suited to producing pizza and better suited to producing Colas. 

As a result, the opportunity cost of producing same amount of pizza increases as we produce more pizzas.

 Increasing Opportunity Cost

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Since the opportunity cost increases as the quantity of pizza produced increases,

The slope of the PPF also increases as we move down along the PPF.

That’s why the PPF bows outward!

Production Possibilities and Opportunity Cost