Production possibility frontiers? What do we need to know? Lets look at Edexcel Economics 2015 getting started guide…… Search Google for “2015 economics edexcel” – hit “Course Materials” / “Teaching and Learning materials” and then half way down “Getting started Guide”

Production possibility frontiers: What is it all about? 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

Production Possibility Curve This shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology The data below shows the various production possibilities for an economy that produces two goods, Pizza and Beer sets. Draw the above combinations of products on a graph. Put Beer on the vertical axis and Pizza on the horizontal axis. How many Pizza’s can be produced when Beer production is 700? How does this change when only 500 Beer are produced? How does your diagram illustrate: Choice Scarcity? Beer Pizza 1000 400 800 600 1100 1300 200 1400

For simplicity, lets take a world with only 2 products Lets use beer and pizza (a typical college campus?)

A typical PPF has the following shape:. Pizza Beer The curve has a negative slope. The curve is concave to the origin.

Shape of the PPF? Why Concave? If PPF a straight line, we have constant opportunity costs If PPF concave, we have increasing opportunity costs

Consider a straight line PPF Beer given up, the opportunity cost, remains constant Beer Pizza

Concave shape, increasing opportunity costs. Beer given up, the opportunity cost, is increasing Pizza Beer

What is the Law of Increasing Opportunity Cost? The opportunity cost of producing a good increases as more of the good is produced

Why does the Law of Increasing Opportunity costs hold? Because resources are not perfectly adaptable to all products

All points on the curve correspond to full use of resources. Pizza Beer A B

Points outside the the PPF are not feasible with existing resources. Pizza Beer .A

Periods of unemployment or inefficiency in production correspond to points under the PPF. Pizza Beer .A

How do we have more of everything? By increasing our resources

Production Possibility Frontier What could increase the PPF?  natural resources found  population (labour)  technology  infrastructure for production

Economic growth indicates an increase in the total output of an economy. The PPF shifts to the right ! Beer .A Pizza

Can a PPF shift inward (to the left)? YES!! For just the opposite reasons as an outward shift such as a loss of resources

Economic growth and the Capital Consumer goods tradeoff: From which point would an economy grow faster, A or B? Consumer goods Capital goods A B