Introduction to

Microeconomics
Lecture (2)
Dr. Maha Asfour
Dr. Rania Anis
Faculty of Economic Studies
and Political Science
Alexandria University

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 1. Review on previous lecture
2. Opportunity Cost
3. Production Possibility Frontier/Boundary
Lecture (2): Outline 4. Main Economic Questions

2
Review
• Production is the process of getting goods and services by using
factors of production.
• Factors of production are resources (land, labour, capital, entrepneur)
• Scarcity means that the existing resources are not enough in relation
to the needs and wants.
• Choice occurs because resources are scare
• Scarcity implies choice, and choice implies cost

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 Opportunity Cost
• Opportunity cost: “is the benefit given up by not using resources in an
alternative way”.

• Example: if you have two products named X and Y, and you can use
either 2X or 5Y because you have limited scare resources. If you have
choosen to use 2X, then the opportunity cost is 5Y. In other words, the
number of units of Y which will be given up to produce one unit of X.

• In economics, we have scarcity, so we have to choose so we have

opportunity cost.

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 Production Possibility Frontier/Boundary
• Production Possibility Frontier/Boundary definition: “shows the various
combinations / bundles of two goods that can be produced when all
existing resources are used fully.

• Production Possibility Frontier/Boundary assumptions:

1. Fixed or limited amount of resources.
2. Only two goods are produced when we use all resources.
3. Given a state of technology.

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 Production Possibility Frontier/Boundary
Numerical Example:
Possibility Food (X) Machines (Y)
A 0 150
B 10 140
C 20 120
D 30 90
E 40 50
F 50 0

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• Production possibility curve shows different combinations that can be
produced from two goods.
• Any point outside the curve is unattainable. This can be achieved in
the future only by economic growth…..what do we mean by it??
• Any point on the curve is attainable
• Any point inside the curve is attainable BUT not desired . WHY??
Because of not using all the available resources

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• The slope of the PPC tells you the opportunity
cost of one good in terms of the other.
• The opportunity cost of a car equals the slope
of the production possibilities curve.
• Opportunity costs is shown by the negative
slope of the PPC.
• Moving from point A to B:
the opportunity costs of 100 cars is 200 tons of
wheat.
Therefore,
Opportunity costs of 1 car = !"" tons of
wheat =!
#""
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• Production possibility curve properties:
1. Concave curve: because the opportunity cost is increasing (note
that it might be straight line in some cases)
2. Negatively sloped: because when all resources are being used
having one more of one kind of resource requires having less of the
other kind.
3. It illustrates the three main economic problems:
üScarcity: the points outside the ppc
üChoice: the points on the ppc
üOpportunity cost: when moving from one point to another on the
same ppc

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Effect of Economic Growth
• With additional resources or an
improvement in technology,
the economy can produce more
cars, more wheat, or any
combination in between.
• Economic Growth shifts PPC
outward.
• Now point G becomes attainable.

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Exercise
• Examine the following table then answer the questions below:

1-Graph the production possibilities frontier and calculate the opportunity cost of the first fifteen crabs
produced.
2- What is the economic significance of 25 fish captured and 25 crabs captured?
3-Explain how this economy might be able to produce 45 fish and 45 crabs?

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 Solution
1- Graph
The opportunity cost of the first fifteen crabs is of course the 10 fish given up (15C = 10F).
Therefore, the opportunity cost of any one crab is 10/15 F or 2/3 of a fish.

2- What is the economic significance of 25 fish captured and

25 crabs captured? The economic significance of capturing 25 fish and 50 crabs is that the
harvest would be inside the production possibilities frontier, which suggests some resource
unemployment. That resource unemployment could be land, labor or capital. It could also be the result of

an inefficient use of resources.

3-Explain how this economy might be able to produce 45 fish

and 45 crabs? The economy could do this with the benefits of an increase in resources or a
technological advance in fishing.

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Class Exercise
• The production possibilities Curve (PPC) illustrates the
A) Goods and services that people want.
B)Limits to people’s wants.
C) Amount of each good that people want to buy.
D)Maximum combinations of goods and services that can be
produced.

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Class Exercise

A point inside the production possibilities frontier is

a. efficient but not feasible.
b. feasible but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

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Class Exercises
Show Graphically:
A PPC assuming increasing opportunity cost.
• Plot a point (m) to show inefficient use of resources.
• Plot a point (n) to show scarcity.
• What do the points on the PPC represent?

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 Summary
• The PPF shows all combinations of two goods that an economy
can possibly produce, given its resources and technology.
• The PPF illustrates the concepts of choice and opportunity cost,
efficiency and inefficiency, unemployment, and economic
growth.
• A bow-shaped PPF illustrates the concept of increasing
opportunity cost.
• Watch This video:
[Link]

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 Summary

Economics is about how all the goods and services that we want to
buy are produced and how we earn the income to pay for them.
It also studies how the production and employment system can go
wrong and what can be done to fix it.

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Assignment 1
• Suppose the economy produce two goods: Guns and Butter, The maximum
quantities of both goods, which the economy is able to produce, are illustrated in
different combinations as follows.

Goods Guns Butter

Combination
A 0 200
[Link] the PPC
B 1 180
[Link] regions of
C 2 140 attainable and
unattainable
D 3 80 combinations
E 4 0
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Class Exercise
Critical Thinking
• Suppose a country produces
two goods: corn and cars.
New technology is developed
that increases the amount of
corn that can be produced.
Use a graph to show the
effect of this graph on the
country’s production
possibility frontier.
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