Chapter 1: Problem 7

Explain how a PPF can be used to illustrate bothchoice and opportunity cost.

Short Answer

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A PPF is used to illustrate both choice and opportunity cost. The concept of choice is depicted by all possible combinations of production of two goods on the PPF, whereas the opportunity cost is shown by the trade-off between the two goods when one good is chosen over the other.

Step by step solution

Introduction to PPF

A Production Possibility Frontier (PPF) illustrates the possible combination of two products that can be produced when resources are fully utilized and technology is constant. It is usually represented as a graph with one product on each axis, and a curved or straight line representing the PPF.

Visualizing Choice

Choice involves selecting one option among alternatives. On a PPF chart, all the possible combinations of two goods that can be produced (represented by points on the PPF line) are the 'choices' available to an economy. When resources are fully utilized, choosing more production of one good means less production of the other.

Understanding Opportunity Cost

Opportunity cost is what is given up to get something else. In terms of a PPF, the opportunity cost of producing more of one good is the quantity of the other good that could have been produced with those resources. This is represented by the negative slope of the PPF, implying that to increase the production of one good, the production of the other good must decrease.

Relating Choice and Opportunity Cost

An economy's choice of what bundle of goods to produce, represented by a point on the PPF, involves an opportunity cost. If the economy decides to produce more of one good, it will need to produce less of the other good - that's the opportunity cost of making a choice.

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