Opportunity cost & PPF.

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  • Created on: 04-04-15 16:44
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  • Opportunity costs & Production possibility diagrams.
    • Opportunity cost ; the benefit lost from not choosing the next best alternative.
    • Production Possibility Diagram ; a curve showing the maximum combination of goods & services that can be produced in a set period given the available resources.
      • Improving production potential.
        • Referring to diagram #3.
          • At any point along the PPF it's assumed that all resources are fully utilised. In order to make more, either quantity or quality of the factors of production needs to improve.
          • Technology advances can lead to improved processes & greater productivity. This is particularly true in the electronics industry. This may alter production potential for one or both products, PPF shifts.
          • Some businesses can also see a reduction in productive potential over time.
          • Technical progress improved methods of producing existing goods & services & enables completely new types of goods to be produced.
    • Production Possibility Frontier ; shows the different combinations of economic goods which an ecnomomy is able to produce if all the resources in the economy are fully & efficiently used.
    • Reffering to the diagram #1 - All combinations have an element of opportunity cost!
      • (A) is all beans & no books.
      • (B) & (D) are varying combinations.
      • (C) is sleeping more.
      • (E) is the impossible on current budget.
      • (F) is all books  no beans.
    • Referring to diagram #2 - PPC & Business.
      • At point A, Yo of DVD players are produced & Xo of digital cameras are made.
      • At point B, Y1 of DVD players are produced & X1 of digital cameras are made.
      • At point C, Y2 of DVD players & no digital cameras are made.
      • If production moves from A to B, there will be a trade off. Less DVD players will be made but more digital cameras.
    • PPC & The Economy.
      • All economies will produce a combination of both capital goods and consumer goods.
        • Capital Goods ; goods used to produce other goods including consumer goods.
        • Consumer Goods ; goods used by the consumers to meet their needs & wants. These can either be durable or non-durable.
      • Referring to diagram #4.
        • Economies will be ale to make a combination of either capital goods or consumer goods with available resources.
        • If they want to increase consumer goods, there's an opportunity cost of Yo - Y1.
      • Referrin to diragram #5.
        • It can only produce at points outside the PPF if it finds ways of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards. B = spare capacity, no need to expand PPF outwards.
    • Shift of one variable & Summary.
      • If efficiency & productivity increases in the production of one variable rather than both, there will only be  shift in PPF for one variable. If the technology develops in the manufacture of digital cameras, there will be an increase in the productive potential of digital cameras only PPF2.
      • The key factors that can shift the whole PPF curve to the right include ...
        • Investment in new technology ( C ) .
        • Increased  supply of labour through increases in the population & migration. ( L )
        • Channing attitudes towards entrepreneurialism. (E.
        • Introduction of new resources e.g. minerals . ( L )


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