3. Revision
Opportunity COST:
• the choice implies the existence of
opportunity cost
• The opportunity cost of obtaining a unit of a
certain good is measured by the number of
the scarified another good
• (or)the opportunity cost is the best
alternative you give up when you make any
choice decision .
4. How to calculate the opportunity cost?
The OPP. Cost of (X) =
= =
5. Ex:- if you are given the following table:-
1- Calculate the opportunity cost of good (x) &
explain its meaning.
2- Calculate the opportunity cost of good (y) &
explain its meaning.
Good (y)Good (x)
4010
3020
6. Answer
( Note:- in calculating the opportunity cost, you
can ignore the negative sign)
• The opportunity cost of good (x) = =
-It means to increase (x) by 1 unit we have to
sacrifice 5 units from(y)
• The opportunity cost of good (y)= =
- It means to increase (y) by 1 unit we have to
sacrifice 0.2 units from(x)
7. The production possibility frontier (PPF)
- Assumptions:
• Only two goods produced.
• Amount of resources is fixed.
• All resources are used.
• Technology level is fixed.
- Definition:
The PPF shows all combinations (mix) of two
goods that can be produced in the economy if
all .
9. - Features of PPF:
1- The PPF must be negatively sloped, reflecting the opportunity cost.
i.e.: In order to produce more of one good you have to decrease
production from the other good.
2- Points "on or along" PPF which is (A, B & C) are:
• Attainable: can be produced
• Efficient: resources are fully and efficiently used.
3- Point "below or lower" than the PPF, such as (D):
• Attainable: can be produced.
• Inefficient: resources are not fully or efficiently used.
4- Points above or higher than PPF, such as (E):
• Unattainable: cannot be produced with current resources.
• We can reach such a point if we:
• *Increase productivity
• *Increase resources
• *Technological advance
10. Illustrating Scarcity, Choice, Opportunity Cost
by using the graph of the PPF
• A) Scarcity: is represented by all points lying
above the PPF such as point (E)
• B) Choice: is represented by the need to
choose between points on the PPF such as(a,
b, c )
• C)Opportunity cost: is represented by the
negative slope of the PPF
• (if x increase----> y decrease)
11. Calculations of PPF
Slope of PPF = marginal rate of transformation
= =
Calculate slope of PPF from (B) to (C), and from (C) to (D)?
12. Answer
• Slope of PPF from (B) to (C) = = =
• Slope of PPF from (C) to (D) = = =
13. • The effect of economic growth on the PPF
1-Economic growth
2-Increase in resources
3-Technological progress
4-Increase in productivity
• Will shift the PPF upward (or outward or
rightward) because the society can now
increase the production of both goods
• -The opposite of economic growth, which
mean our production decreased, and then
there will be an inward shift of PPF.
16. The alternative economic system
Planned or command system
-All economic decisions are made by the
government through the central planning
-Public ownership
-No role for market demand & supply
- Prices are determined by government.
17. Free market system
-All economic decisions are made by individuals
(consumers, producers, workers).
-Private ownership.
- Prices are determined by the demand & supply.
- The role of government is the defense , courts ,
projects
-Those individuals cannot do it.
18. Mixed system
-Economic decisions are made by government as
well as the individuals.
- Role of government as well as role of demand
& supply in the determination of prices.
- Public ownership as well as private ownership
at different degrees.
19. Questions
Q1: true or false giving reasons.
1- The production possibility curve is always negatively sloping
straight line.
2- If an economy is using all its resources efficiently to produce one
of three combinations of two goods X and Y, combination A
contains (20X and 100Y), B contains (30X and 80Y) and C contains
(40X and 40Y), the opportunity cost of producing good X is
declining.
3-The production possibility frontier illustrates three concepts:
scarcity, choice and opportunity cost.
4- A point inside a production possibility frontier indicates that
resources are being used very efficiently.
5-The economic growth shifts the PPF inward.
20.
21.
22. • Q(4)- MULTIPLE CHOICES
1) The process by which resources are transformed into useful forms is
A) Capitalization.
B) Consumption.
C) Production.
D) Allocation.
2) The concept of opportunity cost is based on the principle of
A) Need.
B) Consumption.
C) Scarcity.
D) Profit.
3) The production possibility frontier is used to illustrate the concept of
A) The laissez-faire economy.
B) Opportunity costs.
C) Equilibrium.
D) Aggregate demand.
23. 4) The production possibility frontier is a graph that shows
A) All the combinations of goods and services that are
consumed over time if all of society's resources are used
efficiently.
B) The amount of goods and services consumed at various
average price levels.
C) The rate at which an economy's output will grow over time
if all resources are used efficiently.
D) All the combinations of goods and services that can be
produced if all of society's resources are used efficiently.
5) The value of the slope of a society's production possibility
frontier is called its
A) Marginal rate of substitution.
B) Inflation rate.
C) Unemployment rate.
D) Marginal rate of transformation.
