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Macro study guide Chapter The Economic Problem The production possibilities frontier PPF is the boundary between those combinations of goods and services that can be produced and those that cannot o Take two goods at a time and look at the model economy i

Chapter The Economic Problem The production possibilities frontier PPF is the boundary between those combinations of goods and services that can be produced and those that cannot o Take two goods at a time and look at the model economy in which everything remains the same ceteris paribus except the two goods being considered Any point on the frontier and any point inside it are attainable Any point outside the PPF is unattainable We achieve production e ?ciency if we cannot produce more of one good without producing less of some other good Points on the frontier are e ?cient Any point inside the PPF is ine ?cient At such point it is possible to produce more of one good without producing less of the other good At these points resources are either unemployed or misallocated Every choice along the PPF involves a tradeo ? o i e we give up some colas for more pizzas and vice versa o as we produce more pizzas the quantity of cola we can produce decreases Opportunity cost of a pizza is the amount of cola forgone o The quantity of pizzas increases by million while the quantity of cola produced decreases by million The ?fth million pizzas million colas Therefore one of the pizzas cans of cola at the same time one can of cola of a pizza Opportunity Cost is a Ratio opportunity cost of a can of cola is the inverse of the opportunity cost of a pizza Increasing the Opportunity Cost Because resources are not equally productive in all activities the PPF bows outward This bow means that as the quantity produced of each good increases so does its opportunity cost The PPF determines opportunity cost The marginal cost of a good or service is the opportunity cost of producing one more unit of it Marginal bene ?t of a good or service is the bene ?t received from consuming one more unit of it We measure marginal bene ?t by the amount a person is willing to pay for an additional unit of a good or service When we cannot produce more of any one good without giving up some other good we have achieved production e ?ciency We are producing at a point on the PPF When we cannot produce more of any one good without giving up some other good that we value more highly we have achieved allocative e ?ciency The point of allocative e ?ciency is the point on the PPF at which marginal bene ?t equals marginal cost If marginal bene ?t marginal cost we must produce more of the good For instance we are producing too few pizzas and are better o ? moving along the PPF to produce more pizzas C If marginal cost marginal bene ?t we get more value from our resources by producing fewer pizzas and are better o ? moving along the PPF to produce fewer pizzas If marginal cost marginal bene ?t we are producing the