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In the context of a PPF, opportunity cost is directly related to the shape of the curve (see below). If the shape of the PPF curve is a straight-line, the opportunity cost is constant as the production of different goods is changing. But, opportunity cost usually will vary depending on the start and end points.
A, however, is inside of the PPF and represents a combination of output that is not utilizing all available resources. In macroeconomics, the guns versus butter model is an example of a simple production–possibility frontier. It demonstrates the relationship between a nation's investment in defense and civilian goods.
It assumes an economy with one consumer, one producer and two goods. The title " Robinson Crusoe " is a reference to the 1719 novel of the same name authored by Daniel Defoe . As a thought experiment in economics, many international trade economists have found this simplified and idealized version of the story important due to its ability to ...
Modern accounting also incorporates the concept of opportunity cost into the determination of capital costs and capital structure of businesses, which must compute the cost of capital invested by the owner as a function of the ratio of human capital. In addition, opportunity costs are employed to determine to price for asset transfers between ...
The offer curve is derived from the country's PPF. We describe a Country named K which enjoys both goods Y and X. It is slightly better at producing good X, but wants to consume both goods. It wants to consume at point C or higher (above the PPF). Country K starts in Autarky at point C. At point C, country K can produce (and consume) 3 Y for 5 X.
An example PPF: points B, C and D are all productively efficient, but an economy at A would not be, because D involves more production of both goods. Point X cannot be achieved. Productive efficiency occurs under competitive equilibrium at the minimum of average total cost for each good, such as the one shown here.
The marginal rate of substitution between perfect substitutes is likewise constant. An example of a utility function that is associated with indifference curves like these would be (,) = +. If two goods are perfect complements then the indifference curves will be L-shaped. Examples of perfect complements include left shoes compared to right ...
The slope of the curve at a point on it gives the trade-off between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter.