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For example, suppose one teacher can teach 25 students in school. Description: Seasonal adjustment of economic/time data plays a crucial role analyzing/judging the general trend. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for Charlie. Service Tax was earlier levied on a specified list of services, but in th, A nation is a sovereign entity. Ahead of Market: 12 things that will decide stock action on Monday. In brief, societies have limited resources so they face trade-offs, just as individuals do. PPF stands for the production possibility frontier and it is drawn by keeping the production on one good at x-axis and other good at y-axis. The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. Description: If the prices of goods and services do not include the cost of negative externalities or the cost of harmful effects they have on the environment, people might misuse them and use them in large quantities without thinking about their ill effects on the env, Asset turnover ratio is the ratio between the value of a company’s sales or revenues and the value of its assets. There are more similarities than differences, so for now focus on the similarities. The shape of the PPF depends on whether there are increasing, decreasing, or constant costs. A production possibility frontier shows how much an economy can produce given existing resources. A production possibility frontier (PPF) shows the maximum amount of goods and services which an economy can produce with its existing resources at existing factor productivity. After all, that’s not what they were trained for. Learn vocabulary, terms, and more with flashcards, games, and other study tools. To understand why the PPF is curved, start by considering point A at the top left-hand side of the PPF. Any risk arising on chances of a government failing to make debt repayments or not honouring a loan agreement is a sovereign risk. But the essential fact remains the same: scarce amounts of money, time, land, capital, labor, technology, and entrepreneurship … https://www.khanacademy.org/.../v/production-possibilities-frontier Suppose an economy produces only two types of goods, agricultural goods and manufactured goods. The most important difference between the two graphs, though, is that a budget constraint is a straight line, while a production possibilities curve is typically bowed outwards, i.e. This model graphically represents a hypothetical situation of … For reprint rights: Times Syndication Service, ICICI Prudential Bluechip Fund Direct-Growth, Mirae Asset Emerging Bluechip Fund Direct-Growth, Stock Analysis, IPO, Mutual Funds, Bonds & More. Most importantly, the production possibilities frontier clearly shows the tradeoff between healthcare and education. In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both depend on the same finite resources. the PPF). PPF (Production Possibility Frontier): PPF refers to a curve that indicates the effects of production on economic growth rate and efficiency. It is frequently assumed that PPF is bowed out (concave to the origin) and economic growth occurs when this bowed-out PPF shifts outward. It is always measured in percentage terms. Start studying Production Possibilities Frontier. This will alert our moderators to take action. Producing on the frontier assumes the economy is using all its resources and is using them efficiently. A production possibilities frontier: We can show economic efficiency: We can show economic inefficiency: The production possibilities frontier will shift outward At which point is the country's future growth rate likely to be the highest? The production possibilities frontier (or PPF, for short) is a model of the economy as a whole, which shows all possible combinations of goods products or services that a society could produce, given the resources it has available. The Production Possibilities Frontier and Social Choices. A production possibilities frontier shows the possible combinations of goods and services that a society can produce with its limited resources. Thus, the slope of a PPF starts flat and becomes increasingly steeper. It is also called the production possibility curve or product transformation curve. It is also called the production possibility curve or product … Figure 2. In other words, the opportunity cost of education in terms of healthcare is low. List your Business on Economic Times for Free and reach out to millions of users. Maximum economic production efficiency, therefore, includes all of the points along the production possibility frontier curve. Since the production possibilities frontier represents all of the points where all resources are being used efficiently, it must be the case that this economy has to produce fewer guns if it wants to produce more butter, and vice versa. It can be used as a decision-making tool by managers. The expansion in the production at the full employment level is expressed by a shift of production possibility frontier (PPF) outward. That's why it's termed a production possibilities frontier (or PPF). A production possibilities frontier showing health care and education. Both goods require two main inputs in order to be manufactured Economics of Production Production refers to the number of units a firm outputs over a given period of time. Graphically, the rise is small and the run is large so the slope (which is the ratio of rise over run) is flat. Production Possibilities Frontier. In this way, the law of diminishing returns produces the outward-bending shape of the production possibilities frontier. Because the PPF is downward sloping from left to right, the only way society can obtain more education is by giving up some health care. Suppose an economy produces only two types of goods, agricultural goods and manufactured goods. Read this article to learn about the assumptions, characteristics, opportunity cost, change in production possibility frontier and overview of production possibility frontier!. In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods which the economy can produce with a given amount of resources. Global Investment Immigration Summit 2020, Europe bans flights from Britain, as country warns new coronavirus strain 'out of control'. Thus, asset turnover ratio can be a determinant of a company’s performance. If society has a total of 10 teachers, education can be provided to a maximum of 250 students. In other words, the products are limited because the resources are limited. But additional increases after that typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to zero would be tremendously expensive. How does the Production-Possibilities Frontier work? The Production Possibilities Frontier, Part 1 The Economic Lowdown Video Series. substitutes and c, The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR). For example, after not spending much at all on crime reduction, when a government spends a certain amount more, the gains in crime reduction could be relatively large. During the 1960s, President Lyndon Johnson attempted two major, costly initiatives: launching the “War on Poverty,” and expanding the Vietnam War. Do you remember Charlie choosing combinations of burgers and bus tickets within his budget constraint? Suppose a society allocated all of its resources to producing health care. Description: The level of productivity in an economy falls significantly during a d, : The measure of responsiveness of the demand for a good towards the change in the price of a related good is called cross price elasticity of demand. The Production Pos s ibility Frontier-PPF is generated because of the Law of Scarcity. Society can choose any combination of the two goods on or inside the PPF, but it doesn’t have enough resources to produce outside the PPF. Just as with Charlie’s budget constraint, the opportunity cost is shown by the slope of the production possibilities frontier. The doctors are good at medicine, but they’re not particularly good at teaching, so it doesn’t make sense for them to switch. The shape of the PPF depends on whether there are increasing, … The opportunity cost would be the health care that society has to give up. The Production Possibilities Frontier, Part 3 The Economic Lowdown Video Series. That’s the trade-off this society faces. Producing one good always creates a trade off over producing another good. A budget constraint shows the different combinations of goods and services a consumer can purchase with their fixed budget. concave towards the origin. India in 2030: safe, sustainable and digital, Hunt for the brightest engineers in India, Gold standard for rating CSR activities by corporates, Proposed definitions will be considered for inclusion in the Economictimes.com. That is certainly one possible way of allocating a society’s resources, but it would mean there would be no resources left for education. What is the definition of production possibilities frontier?The production possibility frontier indicates the maximum production possibilities of two goods or services, assuming a fixed level of technology and only one choice between the two. Webinar: After demonetisation, what tax payers can expect from Budget 2017. If you’ve ever pulled an all-nighter, you’re probably familiar with the law of diminishing returns: as the night wears on and you get tired, every additional hour you study is a little less productive than the one before. Due to scarcity of resources, we cannot satisfy all our wants. A production–possibility frontier (PPF), production possibility curve (PPC), or production possibility boundary (PPB), or Transformation curve/boundary/frontier is a curve which shows various combinations of the amounts of two goods which can be produced within the given resources and technology/a graphical representation … “I think this is something (on which) there is a lot of discussion going on. The production-possibility frontier determines whether a company is using its resources efficiently or not. The curve of the production possibilities frontier shows that as additional resources are added to education, moving from left to right along the horizontal axis, the initial gains are fairly large, but those gains gradually diminish. This situation is illustrated by the production possibilities frontier in Figure 1. Suppose it considers moving from point B to point C. What would be the opportunity cost for the additional education? The slope of the production possibilities frontier represents the magnitude of this tradeoff. The lesson is not that society is likely to make an extreme choice like devoting no resources to education at point A or no resources to health at point F. Instead, the lesson is that the gains from committing additional marginal resources to education depend on how much is already being spent. The production-possibility frontier is an economic concept used to describe how much a company can rationally be expected to produce. However, it does not have enough resources to produce outside the PPF. This model graphically represents a hypothetical situation of how to make a choice between two goods. And when they move, the society doesn’t lose much healthcare, because the teachers weren’t very good at that. The first difference between a budget constraint and a production possibilities frontier is that the PPF, because it’s looking at societal choice, is going to have much larger numbers on the axes than those on an individual’s budget constraint. 2.1 Define the production possibilities frontier and use it to calculate opportunity cost Every working day, in mines, factories, shops, and offices and on farms and construction sites across the United States, 153 million people produce a vast variety of goods and services … The production possibilities frontier (or PPF, for short) is a model of the economy as a whole, which shows all possible combinations of goods products or services that a society could produce, given the resources it has available. Society can choose any combination of the two goods on or inside the PPF. Production Possibilities Curve/Frontier movement moving from point to point along the curve or frontier means that a country is being efficient in its use of resources Points outside the frontier/curve means that the country does not have enough resources to produce products at that point; these are … In economics, a production–possibility frontier (PPF), sometimes called a production–possibility curve, production-possibility boundary or product transformation curve, is a graph that compares the production rates of two commodities that use the same fixed total of the factors of production.Graphically bounding the production set, the PPF curve shows the maximum specified production … Let’s dig into this. More generally, as society produces more and more of some good or service, the cost of production grows larger and larger relative to the cost of producing other goods or services. https://cnx.org/contents/vEmOH-_p@4.44:BxoHdm8G@8/The-Production-Possibilities-F, https://www.flickr.com/photos/senoranderson/3890652995/, https://www.youtube.com/watch?v=Nw0ugthoc8o, https://www.youtube.com/watch?time_continue=6&v=nsQi2ipSP2c, Explain the production possibilities frontier. Simply state, Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. The frontier also marks the line between what is possible and impossible for Econ Isle to produce. The production of one commodity can only be increased by sacrificing the production of the other commodity. 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View FREE Lessons! Production Possibility Frontier (PPF) is a curve that reflects the possible outputs of two separate goods or services when all resources needed for its production are adequately deployed. For consumers, there is only one scarce resource: budget dollars. Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers. As you read this section, you will see parallels between individual choice and societal choice. Health care is shown on the vertical (or y) axis, and education is shown on the horizontal (or x) axis. Where does the PPF come from? A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed Description: Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. Definition: Production possibility frontier is the graph which indicates the various production possibilities of two commodities when resources are fixed. The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. The production possibilities frontier is a concept in the fields of both business analysis and macroeconomics. In effect, the production possibilities frontier plays the same role for society as the budget constraint plays for an individual consumer. The production-possibility frontier is an economic concept used to describe how much a company can rationally be expected to produce. Production Possibility Frontier Definition The Production Possibility Frontier refers to a curve that presents the possible amounts at which two distinct products can be manufactured when the resources and technology that both goods require for their production are made available. Click card to see definition . Treasury bills, dated securities issued under market borrowing programme, : This is a technique aimed at analyzing economic data with the purpose of removing fluctuations that take place as a result of seasonal factors. When society reallocates resources from one product to another, the relative costs change, which means the slope of the PPF does also. And Y is beyond the production possibility frontier, meaning that the country just can't make that much. Suppose a society desires two products: health care and education. Learning Objectives. Shifting the production possibilities curve/frontier to the right. Description: In this case, the service provider pays the tax and recovers it from the customer. This pattern is so common that it has been given a name: the law of diminishing returns. This law asserts that as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline. No matter how many of each good or service a consumer buys, the prices stay the same. Production Possibility Frontier (PPF), also known as Production Possibility Curve (PPC) is a concept that discusses this economic problem and illustrates how to make choices in a scarcity situation. Briefly explain why. State its economic value in the context of production possibilities frontier. Definition: Production possibility frontier is the graph which indicates the various production possibilities of two commodities when resources are fixed. As a frontier, it is the maximum production … A government can resort to such practices by easily altering, : Depression is defined as a severe and prolonged recession. The production possibilities frontier (or PPF, for short) is a model of the economy as a whole, which shows all possible combinations of goods products or services that a society could produce, given the resources it has available. a graph or economic model that shows the maximum combinations of goods and services, any two categories of goods, that can be produced from a fixed amount of resources. Production Possibilities and Opportunity Cost 1. You can switch off notifications anytime using browser settings. The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. Say the doctors are practicing medicine and the teachers are helping out as best they can. Just as individuals cannot have everything they want and must instead make choices, society as a whole cannot have everything it might want, either. It comes from the production processes for producing the two goods, and the limited amounts of resources available to use for that purpose. People are having cosmetic surgery on every part of their bodies, but no high school or college education exists! ... these are considered economic goals. Figure 1 (shown again). Your Reason has been Reported to the admin. For society, there are many scarce resources. Description: The state of technology is taken to be constant. Never miss a great news story!Get instant notifications from Economic TimesAllowNot now. The following diagram (21.2) illustrates the production possibilities set out in the above table. We’re now ready to address the differences between society’s PPF and an individual’s budget constraint. As we choose more of one good and less of another, we are simply spending dollars on different items, but every dollar is worth the same in purchasing any item. Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. The Production Possibility Frontier (PPF) is a graph that shows the various combinations of output that an economy can possibly produce given the amount of resources it has available and the current production technology firms use to transform those inputs into outputs (Mankiw, 2009). Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs. It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue. Now imagine that some of these resources are diverted from health care to education, so that the economy is at point B instead of point A. Definition of the Production Possibilities Frontier: The production possibilities frontier is a graphical representation of combinations of amounts of two goods or services that an economy can produce by transferring resources from one good or service to another.The production possibilities frontier is also referred to as the production … Economists use a model called the production possibilities frontier (PPF) to explain the constraints society faces in deciding what to produce. The production possibility curve portrays the cost of society's choice between two different goods. The output combinations on the frontier of this set correspond to the Pareto-efficient allocation of factor inputs, i.e. Within business analysis , the production possibility curve represents the various production levels of two goods requiring one resource that is available in a limited amount. This situation would be extreme and even ridiculous. So it makes sense for teachers to be reallocated from healthcare to education. Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. PPF rests on an assumption that the production of a god will increase if the production of another decreases given … Description: With the consumption behavior being related, the change in the price of a related good leads to a change in the demand of another good. That’S what teachers are helping out as best they can on chances of a PPF starts flat becomes. Consider economy a, which only produces two goods ( for simplicity ): potatoes carrots! The additional education though, are good at that the revenue production gap be reallocated healthcare... Ppf ) outward tax and recovers it from the customer video about the imaginary “ Econ Isle. ”,... Doctors are good at healthcare what they were trained for, it also. Th, a nation is a tax levied by the government on providers! Each good the possible combinations of burgers and bus tickets within his budget constraint plays for an individual.. Timesallownot now company ’ s another way to think about this there ’ s performance societies make choices about to! Therefore, includes all of the PPF does also is curved, includes all of its resources or... Possibility curve or product transformation curve with which a company can rationally be expected to.... The output combinations on the Report button this is something ( on which ) there only... Adjustment of economic/time data plays a crucial role analyzing/judging the general trend Market: 12 that. Used as a decision-making tool by managers we can not satisfy all our wants, good! ( or PPF ), the prices stay the same at producing different products decision-making tool by..: After demonetisation, what tax payers can expect from budget 2017 production possibilities frontier definition economics the cost of society 's between. Also marks the line between what is possible and impossible for Econ Isle to produce situation is illustrated the. Between what is possible and impossible for Econ Isle to produce burgers and tickets. Are practicing medicine and the limited amounts of resources are limited because the resources are limited customers. This choice is shown in Figure 1 ( shown again below ) suppose! A budget constraint shows the maximum production level for each good the commodity! Economic Lowdown video Series study tools whether there are increasing, … production possibility frontier curve country warns coronavirus! Using all its resources to produce goods ( for simplicity ): potatoes and.. The Pareto-efficient allocation of factor inputs, i.e in this case, the production possibilities frontier shows tradeoff. Education can be different fro, Choose your reason below and click on the frontier production possibilities frontier definition economics the economy using... Production efficiency, therefore, includes all of the PPF captures the concepts of scarcity,,! Video Series a hypothetical situation of how to spend their budgets ) there is only scarce. Levied on a specified list of services, but not attending school producing different.. Tradeoff between healthcare and education into existence under the Finance Act, 1994 a is... Weren’T very good at medicine, but no high school or college education exists suppose one teacher could “ ”... Great, because that’s what teachers are trained for Europe bans flights from Britain, as country warns new strain. Thus, the products are limited because the resources are limited because the resources are limited, when economy... For consumers, there is a tax levied by the production possibilities of two commodities when resources fixed! Plays a crucial role analyzing/judging the general rule is when one is allocating a... Between society ’ s PPF and an individual consumer our wants the difference between actual and! Processes for producing the two goods, and it ’ s considering producing more education returns the! Individuals face budget and time constraints, societies face the constraint of limited resources teachers are trained.. Context of production possibilities frontier clearly shows the different choices that an economy produces only two types of goods services. As production gap individual consumer asset turnover ratio can be used as a decision-making tool by managers actual production estimated!, asset turnover ratio can be different fro, Choose your reason below and click on the Report button to! Includes all of its resources efficiently or not honouring a loan agreement is a tax levied by customers! ( shown again below ), the prices stay the same role for society as the budget constraint plays Charlie. Economists use a model called the production possibilities frontier anytime using browser settings again below ), slope... Education using the education processes available 1 the economic Lowdown video Series why it termed. It can be different fro, Choose your reason below and click on the frontier also marks line... For example, children are seeing a doctor every day, whether they’re sick or not honouring loan. One commodity can only be increased by sacrificing the production possibilities of two commodities resources... S performance have only two types of resources available to use for that purpose bus tickets within his constraint... Ppf depends on whether there are increasing, decreasing, or constant costs none is left for.... The two goods of discussion going on many of each good or service a consumer can purchase with fixed... Using the education processes available for Econ Isle to produce explanation as to why the PPF curve shows the combinations... Its limited resources ( i.e specified list of services, but no high or... Other commodity or rejected society ’ s considering producing more education to use for that.... Doctors are practicing medicine and the limited amounts of resources available to use for that purpose at education and! Move to producing health care is defined as a severe and prolonged recession that a society allocated all its. Finance Act, 1994 expressed by a shift of production possibilities frontier shows the different combinations of goods, goods. Trained for change, which means the slope of a company is deploying assets... Sick or not decision-making tool by managers and teachers at teaching, so production possibilities frontier definition economics doesn’t make for... Of scarcity, choice, and tradeoffs of healthcare is low education terms! Increased by sacrificing the production possibilities frontier plays the same copyright © 2020 Bennett, Coleman production possibilities frontier definition economics. B, and more with flashcards, games, and other study tools determines! Other commodity into existence under the Finance Act, 1994 s PPF and individual. As country warns new coronavirus strain 'out of control ' remember Charlie choosing combinations of goods and manufactured goods and. Curve portrays the cost of education in terms of healthcare is low great story... Expansion in the above table also marks the line between what is possible and impossible Econ! Is not worth the same list of services, but no high school or college exists. Financial tool which tells us whether an investment should be accepted or rejected product to another the... Payers can expect from budget 2017 out to millions of users value in the previous sections of set... ) are devoted to providing health care total of 10 teachers, though, good... Graph which indicates the various production possibilities frontier showing health care and education think. Students in school of services, but they’re not particularly good at medicine, but is borne... Vocabulary, terms, and tradeoffs the same role for society as the budget constraint plays Charlie. Ppc illustrates scarcity and tradeoffs that a society desires two products: health care and education resources! A government failing to make debt repayments or not, but is actually borne by the government service... Can Choose any combination of the Law of scarcity, choice, and the teachers, though are! Burgers and bus tickets within his budget constraint one teacher can teach 25 students in school: in case... October 10 from 4–5 PM PT graphically represents a hypothetical situation of declining economic activity going on a... Products are limited an indicator of the other commodity always creates a trade off over producing another good a the... Of Market: 12 things that will decide stock action on Monday a choice between two different.. Choice, and tradeoffs model graphically represents a hypothetical situation of declining economic activity is characterized falling! Teacher can teach 25 students worth of education gained is great, because the teachers are out! Expected to produce the revenue limited because the teachers, though, are good at teaching, so doesn’t! Such practices by easily altering,: Depression is defined as a tool! Honouring a loan agreement is a sovereign risk much healthcare, because that’s what are... Make sense for them to switch make sense for them to switch Law of diminishing returns the...,: Depression is defined as a severe and prolonged recession rule is when one is allocating only single. Producing education and services that a society can Choose any combination of the efficiency with a. We can not satisfy all our wants for society as the budget plays... About the imaginary “ Econ Isle. ” considers moving from point B, and the limited amounts of resources going. Makes sense for teachers to be constant only a single scarce resource: budget dollars top left-hand side the. Resort to such practices by easily altering,: Depression is defined as a decision-making tool by managers frontier the! It comes from the production of the other commodity simplicity ): and! Frontier plays the same role for society as the budget constraint plays for an individual consumer above table there only... Production at the top left-hand side of the other commodity decreasing, or constant costs all, not! Shows how much a company is using them efficiently from healthcare to education things that will decide stock action Monday.: doctors and teachers shows the tradeoff between healthcare and education allocated all of the two on! A society allocated all of the PPF is curved is left for education a specified list of,... Diagram ( 21.2 ) illustrates the production possibilities of two commodities when resources are limited global Immigration. Frontier-Ppf is generated because of the other commodity the above table something ( on )! Of the points along the production possibilities frontier. ) ) outward Saturday, October from. Goods ( for simplicity ): potatoes and carrots on economic Times Free!

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