Production Possibility Frontier

The Production Possibilities Frontier Let’s introduce the Production Possibilities Frontier better known as the PPF. The PPF is a basic workhorse in economics. Important for understanding some basic issues in economics… like the use of resources. (Candy Activity) The Production Possibilities Frontier

The Production Possibility Frontier - What Is It? The description of the best possible combinations of two goods to produce using all of the available resources. Shows the trade-off between more of one good in terms of the other. Tractors vs. Potatoes Guns vs. Butter We can’t have our cake and eat it too! The Production Possibility Frontier - What Is It?

The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative. If we use all our resources to make potatoes, then we can’t make any tractors. Our opportunity cost in this case is??????? The slope of the Production Possibility Frontier measures the marginal opportunity cost of producing one good in terms of the amount of the other good foregone. Let’s take a look at what this looks like in graph form. Opportunity Cost

The marginal opportunity cost of guns in terms of butter is increasing as we move down the PPF! We are makin’ more guns….but watch the spread on your english muffin!!!! The PPF is typically bowed-out or linear. It is not bowed-in Butter just attainable unattainable inefficient just attainable A Typical PPF Picture Guns

Figure 1: The Production Possibilities Frontier Number of Lives Saved per Period Quantity of All Other Goods per Period 100,000 200,000 300,000 400,000 500,000 1,000,000 950,000 850,000 700,000 At point A, all resources are used for "other goods." A Moving from point A to point B requires shifting resources out of other goods and into health care. B C D At point F. all resources are used for health care. W E F Lieberman & Hall; Introduction to Economics, 2005

Increasing Opportunity Cost According to law of increasing opportunity cost The more of something we produce The greater the opportunity cost of producing even more of it This principle applies to all of society’s production choices Lieberman & Hall; Introduction to Economics, 2005

Recessions A slowdown in overall economic activity when resources are idle Widespread unemployment Factories shut down Land and capital are not being used An end to the recession would move the economy from a point inside its PPF to a point on its PPF Using idle resources to produce more goods and services without sacrificing anything Can help us understand an otherwise confusing episode in U.S. economic history Lieberman & Hall; Introduction to Economics, 2005

Figure 2: Production and Unemployment 1. Before WWII the United States operated inside its PPF . . . Civilian Goods per Period Military Goods per Period 2. then moved to the PPF during the war. Both military and civilian production increased. B A Lieberman & Hall; Introduction to Economics, 2005

What happens with new technology?

Figure 3: The Effect of a New Medical Technology Number of Lives Saved per Period Quantity of All Other Goods per Period 2. But not its vertical intercept. 4. or more lives saved and greater production of other goods. A 1,000,000 3. The economy can end up with more lives saved and un-changed production of other goods . . . J H 700,000 D 1. A technological advance in saving lives increases this PPF's horizontal intercept . . . F F' 300,000 500,000 600,000 Lieberman & Hall; Introduction to Economics, 2005