The Economic Problem

Chapter Three creates the Production Possibilities Frontier model called a "PPF curve.". 

-  It's a graphical theory that let's you measure the limits to which resources can be used. 
-  It forces you to calculate the cost and the consequences of making decisions.

The next module (Module 4) on International Trade puts the theory to use in the real world.

 3.1   Use the production possibility frontier to illustrate the economic problem.

Do the text Practice Problem 3.1 on page 67.  

You should also do Additional Practice Problem 3.2 on page 34 in your study guide.

 3.2    Calculate opportunity cost.

-  Opportunity cost can be measured as the ratio of what you give up to what you get back when you slide from point to point along a PPF.
 

-  Notice that the opportunity cost of an outward bowed PPF is not constant.
 

-  In fact, the opportunity cost of each choice increases as we move in either direction from any position along the PPF.

3.3    Define efficiency and describe an efficient use of resources.

Use the Quick Review on page 36 in your study guide to zero in on this topic.

 3.1   Use the production possibility frontier to illustrate the economic problem.

A.  The production possibilities frontier, PPF, describes the limits to what we can produce by fully and efficiently using all our available resources.

B.  Points inside and on the PPF are attainable.  Points outside the PPF are unattainable.

 3.2   Calculate opportunity cost.

A.  Along the PPF, the opportunity cost of X (the item on the x-axis) is the decrease in Y (the item on the y-axis) divided by the increase in X.

B.  The opportunity cost of Y is the inverse of the opportunity cost of X.  

C.  The opportunity cost of producing a good increases as the quantity produced increases.

D.  Opportunity cost increases because resources are not equally productive in all activities.

 3.3   Define efficiency and describe an efficient use of resources.

A.  Efficiency is the pursuit of any activity until the marginal benefits derived from it equal the marginal costs incurred by the pursuit.

B.  Their are two types of efficiency:

- Allocative efficiency is the production of the set of goods on a PPF that we value most highly.

- Production efficiency is a situation in which we cannot produce more of one good or service without sacrificing some of the other good or service.
Production efficiency means being on the Production Possibility Curve and not inside nor outside of the existing curve.

Take the optional post-study bonus point quizzes on The Economic Problem on Saturday following Module 3.

Take the optional pre-study bonus point quizzes on International Trade on Sunday preceding Module 4.