Production Possibilities Frontier 1st Economic Graph

Economic Models Economists build models to simplify our world used for economic analysis of “real world” based on various assumptions

Production Possibilities Frontier Illustrates the maximum output of a country to produce goods/services using all resources efficiently Assumes a country produces only 2 goods/services PPF slope is the trade-off (opportunity cost) of producing one good versus another good. PPF Graph Trade-off: To gain 1 Fish => give up 2 Coconuts 21

Slope & Opportunity Cost Straight Line: Constant opportunity cost Bowed Line: Increasing opportunity cost 21

Increasing Opportunity “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 -------------- B 900 Increasing Opportunity Cost! 700 C 800 ------------------------------- Quantity 400 1,000 Cars

. C . B . A PPF Graph & Efficiency PPF Graph Shelter Qty Food Qty Any point above line is Unobtainable in Short Run with existing technology & resources (100, 0) (0,100) (50,50) . B . A Any point on line is Efficient production of goods i.e. @ full potential output @ full employment (4.0% for USA) No underemployment Any point below line is Inefficient i.e. Below full potential, wasting resources Qty Shelter

Which Society is more EFFICIENT? Assumptions: -produce only 2 goods -same resources for both countries Country A Country B

Shifts to the right mean a country’s “full potential” has increased Shifting PPF Right Qty of Computers Shifts to the right mean a country’s “full potential” has increased 4,000 You get more from same scarce resources! 3,000 1,000 Shifting PPF left? A country’s full potential would have to permanently decline Example: shrinking labor force (Japan today!) 2,300 650 G 2,200 600 A Qty of Cars

Country’s Goal => Shifting PPF When Factors of Production rise => 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

PPF Multiple Choice Questions PPF Line represents all efficient production points Society’s 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….