Production Possibilities Frontier

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Production Possibilities Frontier
1st Economic Graph

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Economic Models

• Economists build models to simplify our world
• used for economic analysis of real world
• based on various assumptions

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Production Possibilities Frontier

• Illustrates the full potential output of a
  country to produce 2 goods/services
• Assumes a country uses all resources to produce
  only 2 goods/services
• Demonstrates the trade-off (opportunity cost) of
  producing each good

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PPF Graph
Qty Food
PPF Graph
. C
. B
. A
Qty Shelter
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Which Society is more EFFICIENT?
Assumptions -produce only 2 goods
-same resources for both countries
Country A
Country B
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Straight Line PPF

• Slope of PPF Opportunity Cost

. A
Qty Food
What is the Opportunity Cost of moving from
point A ? B ?
10
. B
----------
5
-----------
10
5
Qty Shelter
7
Opportunity Cost
8
Bowed PPF Curve
Quantity
Houses
.A
Opp. cost of moving from Point A ?
B Opportunity Cost of gaining 400 Cars is 100
Houses Gain 1 Car ? Give up 1/4 House
1,000
Move from Point B ? C Opportunity Cost of
gaining 400 Cars is 200 Houses Gain 1 Car ? Give
up 1/2 House
--------------
900
700
-------------------------------
Quantity
0
1,000
400
Cars
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Shifting PPF Right
Qty of
Shifts to the right mean a countrys full
potential has increased
Computers
Shifting PPF left? A countrys full potential
would have to permanently decline Example
shrinking labor force
(Japan today!)
Qty of
0
Cars
10
Countrys Goal gt Shifting PPF

• When Factors of Production rise gt PPF Shifts
  right

1) Land- all basic natural resources 2)
Labor- human work/labor 3) Physical Capital-
previously produced goods 4) Human
Capital education, skills, etc 5)
Entrepreneurship- managerial ability risk
taking
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PPF Multiple Choice Questions

• PPF Line represents all efficient production
  points
• Societys full potential to produce goods
  services
• Points below PPF are inefficient (not using
  resources fully)
• Points above PPF are not attainable in short run
• Cannot attain it with existing technology
  resources
• Bowed PPF curves have increasing opportunity
  cost
• Straight Line PPF curves have constant
  opportunity cost
• Long Run goal is to shift the line outward
  (raise full potential)
• How? Discover new resources, improve
  technology, expand labor force, improve human
  capital etc.