This is the first chapter of Introduction to Economics, one of the modules which I am supposed to take in order to complete my course in Economics and Finance. For the next few months till my exams, I wish to use blogging as a way to share what I've learnt, as well as to drive myself to better remember whatever I've studied from my books.
I wish to encourage more participation in this blog, to share your views, or give me suggestions of where I can read up, to better understand on the subjects which is in discussion.
Lets start.
Production Possibiolity Frontier (PPF)
It shows the maximum combination of goods that can be produced given the amount of resources and the state of technology in the economy. This is also known as labour constraint.
E.g. You have 100 labour and you can produce 100 of X OR 100 of Y.
PPF is also known as labour constraint.
Opportunity Cost
In layman terms, this is the "cost" of the best possibile alternative to be given up in order to make another choice possible.
E.g. If 1 person can produce 10 bread OR 10 cakes a day. In order to produce 20 bread instead of 10, the opportunity cost will be the 10 cakes, which the person will not be producing, in order to put aside the time to bake the extra 10 bread.
Formula: What we had to give up / What we got in return
= 10 cakes / 10 bread
= 1 cake per 1 extra bread baked
= Opportunity Cost
Efficient Allocation
This is a mean of production which yields a combination of out puts, where it is not possible to increase the output of one good without reducing the output of another good.
E.g. Using the above example illustrated in "Opportunity Cost". The person's time is efficiently allocated as he is not able to produce more bread without reducing the number of cakes he can produce.
We have to note, that however, there are 2 distinct efficiency in economy.
1. Tangible Goods (such as food): Productive Efficiency
2. Intangible Goods (such as the well being of a person): Allocative Efficiency
