The Economic Problem. Learning Objectives. Use the production possibilities frontier to illustrate the economic problem. Calculate opportunity cost Define efficiency and describe an efficient use of resources. Explain what makes production possibilities expand.
The production possibilities frontier is a valuable tool for illustrating the problem of scarcity—and its consequences.
PPF: the boundary between the combinations of goods and services that can be produced and the combinations than cannot be produced, given the available resources of production and the state of technology.
Technology is the application of scientific or other types of know-how to practical tasks.
Production efficiency occurs when it is not possible to produce more of one good or service without producing less of something else.
Economists say “there is nofree lunch” from society’s point of view. Preparing the lunch took resources that couldhave been used to produce something else.
Moving from point U to an efficient point is like getting a free lunch.
Opportunity cost is defined as the next best alternative given up by making a choice.
Productive resources are specialized—meaning, resources are more useful in some productive tasks than others.
A situation in which the quantities of goods and services produced are those that people value most highly—it is not possible to produce more of a good or service without giving up some of another good that people value more highly.
Marginal benefit is the extra benefit (or happiness, satisfaction) we derive from consuming one more unit of a good. MB is measured by what we are willing to give up to get one more unit of the good.
Marginal cost is the opportunity cost of producing one more unit of a good or service.
MB & MCCD’s/Bottle
Bottles of Water (Millions per year)
Making new machinery and buildings takes resources. So does education and training. We must give up some consumption in the near term.