The Production Possibility Frontier

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The Production Possibility Frontier Outline how the production possibility frontier can be used to demonstrate opportunity cost and explain the effects of unemployment and technological change on production in the economy. The production possibility frontier is useful in demonstrating opportunity cost as well as being invaluable when explaining the effects of unemployment and technological change on production in the economy. The production possibility frontier is the most effective way to demonstrate opportunity cost. The production possibility frontier is a graph that contains all possible combinations, in terms of quantity, of an economy that manufactures only two unique products at maximum efficiency, is of a given technology standard and has a fixed amount of available resources. The opportunity cost or ‘real cost’ is not the monetary value paid for a good or service but the next best alternative forgone in its place. Opportunity cost is directly related to and dependent on the production possibility frontier, the opportunity cost may be read from any point on the production possibility frontier. On the graph below: - at Point A the opportunity cost of producing 500 apples is 250 bananas - at Point B the opportunity cost of producing 2000 apples is 1000 bananas - at Point C the opportunity cost of producing 500 bananas is 1000 apples - at Point D the opportunity cost of producing 1000 bananas is 2000 apples The opportunity cost of 1 apple = ½ banana. The opportunity cost of 1 banana = 2 apples. Unemployment reduces the level of production in an economy as it is operating inefficiently, thus less goods and services are produced which in turn causes less wants to be satisfied. An economy can only operate on the production possibility frontier when it is at maximum efficiency: to do this all resources must be fully utilized.
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