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Introduction to
Economics
The Economic Problem
Opportunity Cost
Production Possibility
Frontiers
Opportunity Cost
Definition the cost expressed in terms
of the next best alternative sacrificed
Helps us view the true cost of decision
making
Implies valuing different choices
Production Possibility
Capital Goods
Frontiers IfAssumeIf it devotes all
the country is
a country
Ifresources to its
it reallocates capital
atcan
goods
produce
point
resources A ontwo
it (moving
could the
round
Ym types
PPF
the PPF
produce of
Itfrom
canagoods
A to B) it can
maximum
with
of Ym.its
produce
produce moreresources
consumer
the
goods but only
capital at the
goods
combination
If it devotes
expense of
its Yo
allcapital
of fewer
A and
goods. consumer
Thegoods
opportunity
Yo capital
resources
goods
to and
cost of producing
consumer goods anitextra
Xo
Xo consumer
X1 consumer goods
could produce a
goods capital goods.
is Yo Y1
maximum of Xm
Y1 B
Xo X1 Xm Consumer Goods
Production Possibility
Frontiers
Capital Goods
Production
It can only produce at
points outside the PPF
inside the PPF
if it finds a way of
e.g. point
expanding its B
means or
resources theimproves
Y1
C the productivity
country of
is not
those resources it
usinghas.all This
its will
A already
.
Yo resources
push the PPF further
outwards.
Xo X1 Consumer Goods