Production Possibilites & Cost-Benefit Analysis

Notes by Sophia

• Production possibilities frontier
o Definition: Diagram representing various combinations of goods and services an economy can produce when all its resources are in use.
o The producer can choose which products to produce and the amounts of each.
o The diagram indicates the maximum combinations of goods and services that can be produced.
o If some resources are not fully employed the producer will never reach its maximum potential production.
o The production possibilities frontier represents potential output at a given point in time.
o Factors that can cause a production possibilities frontier to expand:
 Population growth
 Expansion of stock capital
 Technological improvements
 Increase of productivity
o Outward movement of the production possibilities frontier indicates economic growth

• Cost-Benefit Analysis
o Definition: way of thinking about a choice that compares the cost of an action an action to its benefits.
o Businesses choose to invest in projects that have the best cost-benefit ratio.
o The highest the benefit for the lowest cost indicates a better option for investment.