opportunity cost/ppf Flashcards
What is Opportunity Cost?
Opportunity Cost is the value of the next best alternative that is foregone when making a decision.
What does the Production Possibility Frontier (PPF) show?
shows the combinations of output an economy can produce using its fixed resources and technology.
Why is the PPF typically curved outwards?
due to the law of increasing opportunity cost, which indicates that resources are not equally productive in producing different goods.
What assumptions are made in the PPF model?
The PPF assumes:
Resources are fixed in quantity and quality.
Technology is fixed.
The economy can only produce two types of goods.
What does a movement along the PPF indicate?
A movement along the PPF indicates a change in the allocation of resources between the two goods being produced, reflecting opportunity costs.
How is Opportunity Cost calculated?
Opportunity Cost = What is given up / What is gained
What can push the PPF outwards?
Improvements in technology or education can push the PPF outwards, indicating more efficient use of resources and economic growth.
What is Economic Growth?
increase in an economy’s capacity to produce goods and services, often due to an increase in the quantity or quality of resources.
What is the tradeoff between consumer goods and capital goods in the context of economic growth?
Producing more consumer goods today may limit resources for producing capital goods, which are essential for future economic growth.
How does the law of increasing opportunity cost relate to the slope of the PPF?
As production of one good increases, opportunity cost rises because resources become less suited to its production.
