Production Possibility Frontier
Part Two
Confronting scarcity: Choices in
Production
All the production points
along the PPF are
efficient choices.
➢ An economy chooses
on specific point based
on the trade-off and
the opportunity cost
attached to the
choice.
Trade-off along PPF
Producing one more
unit of a good (e.g.
Pizza) requires giving
up some of other good
(Cola).
Every choice along
the PPF involves a
trade-off.
Opportunity cost
What we loose in a
trade-off is called
Opportunity Cost (the
foregone opportunity).
➢ What is the
opportunity cost
between E and F ?
In moving from E to F
In order to produce one
million more pizzas, we
MUST forgive the
production of five million
cans of cola.
In other words, the
Opportunity Cost of
this decision is five
million cans of cola
(what we loose).
In moving from F to E
In order to produce five
million more cans of
cola, we MUST forgive
the production of one
million pizzas.
In other words, the
Opportunity Cost of
this decision is one
million pizzas (what we
loose).
Self-quiz
Opportunity cost exists because
A) prices must adjust to eliminate shortages.
B) the opportunity cost is the wages paid to the
labour as a production factor.
C) resources in this world are scarce.
D) the opportunity cost is an indirect cost.
Self-quiz
Opportunity cost exists because
A) prices must adjust to eliminate shortages.
B) the opportunity cost is the wages paid to the
labour as a production factor.
C) resources in this world are scarce.
D) the opportunity cost is an indirect cost.
Self-quiz
➢ The opportunity cost of
increasing production in
corns, by moving?
From a to b?
From c to d?
Self-quiz
➢ The opportunity cost of
increasing production in
corns, by moving?
From a to b?
200 yards of cloth
From c to d?
200 yards of cloth
Marginal Cost
The Marginal Cost
of a good or service
is the opportunity
cost of producing
one more unit of it.
The Marginal Cost
(MC) of any decision
is what we loose
divided by what we
gain.
In moving from E to F
What we loose: production of
five million cans of cola.
What we gain: production of
one million pizzas.
The Marginal Cost (MC) of
this decision is five million
cans of cola (what we loose)
over one million pizzas (what
we gain).
Therefore, the MC of this
decision is five cans of cola.
In moving from F to E
What we loose: production of
one million pizzas.
What we gain: production of
five million cans of cola.
The Marginal Cost (MC) of
this decision is one million
pizzas (what we loose) over
five million cans of cola (what
we gain).
Therefore, the MC of this
decision is 1/5 of a pizza.
Marginal Cost (MC) of production
✓ The Marginal Cost of a
good or service is the
opportunity cost of
producing one more
unit of it.
✓ Having this PPF, what
will be the marginal
cost of producing
pizza?
Marginal Cost (MC) of production
➢ In the lower diagram, the bars
illustrate the increasing
opportunity cost of a pizza.
Marginal Cost line passes
through the middle point of
each bar.
➢ The marginal cost increases
when the production of a
good increases.
Self-quiz
➢ We found the opportunity cost of
increasing production in corns, by
moving?
From a to b? 200 yards of cloth
From c to d? 200 yards of cloth
➢ The marginal cost of the decision?
From a to b?
From c to d?
Self-quiz
➢ We found the opportunity cost of
increasing production in corns, by
moving?
From a to b? 200 yards of cloth
From c to d? 200 yards of cloth
➢ The marginal cost of the decision?
From a to b? 0.4 yard of cloth
From c to d? 1.33 yard of cloth
Straight line PPF
If the shape of the PPF curve
is a straight-line (linear
PPF), the opportunity
cost is constant.
➢The opportunity cost of
producing one more
butter is 2.5 guns (A to B
or C to D)
➢The opportunity cost of
producing one more gun is
0.4 butters (B to A or D to C).
Self-quiz
• One efficient point?
• One inefficient point?
• The opportunity cost of
producing one bushel of corn? 2
• The opportunity cost of
producing one bushel of
soybeans (marginal cost)?
Self-quiz
• One efficient point? a
• One inefficient point? b
• The opportunity cost of
producing one bushel of corn? 2 2
2 bushels of soybeans
• The opportunity cost of
producing one bushel of
soybeans (marginal cost)? 0.5
bushel of corn
Self-quiz
The above table shows the daily production possibilities
for a bakery. By moving from alternative C to
alternative D,
➢ what is the opportunity cost of producing 30 more
pizzas?
➢ what is the marginal cost of producing one more
pizza?
Self-quiz
The above table shows the daily production possibilities
for a bakery. By moving from alternative C to
alternative D,
➢ what is the opportunity cost of producing 30 more
pizzas? 60 loaves of bread
➢ what is the marginal cost of producing one more
pizza? 2 loaves of bread