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∆y
Slope of PPF = = opportunity cost of 1 unit of x.
∆x
Negative:
Graphically: the PPF slopes downwards.
As all the points on the PPF represent the maximum usage of resources, to increase
1 production, we have to transfer resources from the other production, thus it will
decrease.
Meaning:
∆Guns 14−15
opportunity cost of1st butter = ∆Butter = 1−0 = |-1|Guns
∆Guns 12−14
opportunity cost of2nd butter = ∆Butter = = |-2|Guns
2−1
∆Guns 9−12
opportunity cost of3rd butter = ∆Butter = = |-3|Guns
3−2
Reason: resources are specialized = they’re more suited for 1 production than
the other they’re not perfectly transferable.
(to increase butter by successive units, I’m taking away resources specialized in
gun production and putting them in butter each time gun production is hurt
more and more)
We need to re-educate the workers, adapt machines…
Conclusion:
The PPF decreases (slope is negative) at an increasing rate (slope increases).
∆Guns 5−9
opportunity cost of4th butter = slope of PPF DE = ∆Butter = 4−3 = |-4|Guns
Shift to the right = increase in the PPF = growth in the potential of the
economy
Reasons:
1- Discover new resources.
2- Discover a new technology.
If: a technological advance in butter production the PPF will rotate
and the extreme of butter will increase:
If: a technological advance in gun production the PPF will rotate and
the extreme of gun will increase:
3- Capital Investment:
ovens ovens
Pizza Pizza
A B
Over time, B will be able to use the produced ovens to make more pizzas
than before ovens
Pizza
Reasons:
1- Resources dry out.
2- Resources are destroyed: war, natural disaster…
3- Brain Drain.
4- Theoretically: decrease in technology.