Econ 9: The Study of Economics

Production Possibilities and Opportunity Cost

TA: Sara Sutherland

 

What is Economics?

The study of how individuals, institutions, and society make optimal choices when resources are scarce.

One of most important economic concepts is opportunity cost: what you have to give up to get something else.

Because resources are scarce, there is a limit on how much an economy (or individual can produce). This is represented by the production possibilities curve.

 

Production Possibilities.

This shows different combinations of goods and services and economy can achieve in full employment (assuming resources are fixed and technology is constant)

Ex. We have a factory that makes blankets and sweaters. The factory has limited capacity (space, machines) so it can only make a limited amount of sweaters and blankets per day. The different combinations of goods that can be provided by the factory are given in the table below:

 

 

 

 

 

 

 

 

 

 

Q. Graph the production possibilities curve.

 

Q. Suppose the factory decided to product 9 sweaters and 3 blankets. Graph this point. Would this be optimal?

 

Q. The marginal opportunity cost of the second blanket is:

 

Economic Growth and the Production Possibilities Curve (PPC).

 

Q. How does economic growth affect PPC? i.e. shift inward, outward?