When making these decisions it is important for firms to assess the opportunity cost of their decisions. Opportunity cost is the cost of the next best alternative
Scarcity and Choice - Decisions
In reality decisions regarding the economic problem are likely to be taken with regard to both economic and non economic considerations
Production Possibility Frontiers
These show the potential combinations of goods and services that an economy is able to produce with a certain amount of resources
If an economy is operating at a point that is inside the curve it is inefficient
It is not possible for an economy to operate at a point outside the curve
To operate outside the curve the curve needs to be shifted – this can be done through having more resources or using resources more efficiently.
This is an example of a production possibility frontier with two products – food and computers
Points Q,R, T and V all represent different choices on the PPF
The trade off or opportunity cost of point Q is one computer.