The PPC

. Because resources are scarce, economies cannot have an unlimited output of goods and services. So, societies must choose which goods and services to produce. These choices can be illustrated using a production possibilities model; which illustrates the maximum amounts of two goods that can be produced assuming the full and efficient use of available resources.

. 1. Resources are fixed. There is no way to increase the availability of land, labor, capital or entrepreneurship. However, reallocation of these resources is possible. 2. All resources are fully employed. No unused land, labor, capital, or entrepreneurship exists. The economy is running at full production and producing goods and services at the least cost (productive efficiency]. 3. Technology is fixed. No new technological breakthroughs. The PPC represents one specific time period. 4. Only two things can be produced (2-good model). Four Assumptions for our PPC Model VS

Constant Opportunity Cost 1 Corn = 1 Tomato STRAIGHT LINE The STRAIGHT LINE shows the two products are “equally substitutable”, arenot “equally substitutable”, that is, they are not specialized inparticular uses specialized in particular uses, so the opportunity costs will remain constant opportunity costs will remain constant.

But in the real world resources are not completely adaptable to alternative uses. Thus the PPC graph has a curve that indicates a changing trade-off between resources. Obtaining more of one good requires giving up larger amounts of the alternative good.

Notes... As the production of a good increases, the opportunity cost of producing an additional unit rises. LAW OF INCREASING OPPORTUNITY COSTS The PPC is concaved outward due to the law of increasing opportunity cost.

Capital (thousands) Consumer (hundred thousands ) This is the first of sixteen economic models you will be expected to know, so let’s draw it now. You Y axis will be labeled capital goods, and your X axis will be labeled consumer goods. Don’t worry about the numbers right now. Draw you curve making sure that it is bowed to the right.

E A B C D Consumer Goods Capital Goods This graph show the health of the economy as it is frozen in time. The economy may change in the future; but remember we will assume that things are fixed right now. The relationship between a point on the graph and the curve illustrates the health of the economy.

Capital (thousands) Consumer (hundred thousands ) The curve represents the limit, or frontier, of economic production (how much our economy can produce effectively). Also called full employment, it represents about 96% employment and 80% production capacity. PPF or Full employment

Capital (thousands) Consumer (hundred thousands ) Our economy could be forced to achieve 100% production output. And 100% of our labor force could be forced to work. But this would over-extend the economy. Over-extended economic production is illustrated by placing a point right outside the curve (point A). The economy could give a little bit more output but the cost is too high, because the economy will not be operating at its best level. PPF or Full employment A

B C D E Unattainable *Shows opportunity cost Inefficient Bread Robots Points inside the curve represents economic inefficiency (point B). Resources are not being fully utilized. A point on the curve represents economic efficiency (point C & D). Resources are being fully utilized. Point movement along the curve represents your opportunity cost (moving from point C to point D). The single optimal or best combination of output for any society depends upon the preferences of society. Points far outside the curve represents economically unattainable (point E). The economy can’t produce there unless it grows.

And How Is Economic Growth Demonstrated on a Graph? Like This Economic Growth A B C D C E Capital Goods Consumer Goods 0 [Ability to produce a larger total output over time]

Q Q Robots Robots (thousands) Bread Bread (hundred thousands) More of either or both is possible Factors that Cause Economic Growth; Notes... Economic Growth Increase in resources - 1. Increase in resources - 2. Better resource quality - 3. Technological advances -

More of either or both is possible Factors that Cause Economic Growth; Notes... Economic Growth Increase in resources - 1. Increase in resources - 2. Better resource quality - 3. Technological advances - These factors require an investment in capital goods (they are developments for future economic utility.)

FAVORING PRESENT GOODS FAVORING FUTURE GOODS Goods for the Present Goods for the Future CURRENTCURVE FUTURECURVE CONSUMPTION Goods for the Present Goods for the Future FUTURECURVE CONSUMPTION CURRENTCURVE So economies that produce a majority of capital goods (goods for the future) will experience more economic growth than the economy that produces a majority of consumer goods (goods for the present.)

FAVORING CONSUMER GOODS Goods for the Present Goods for the Future FUTURECURVE CONSUMPTION CURRENTCURVE Technological advance that is useful in producing consumer goods but not capital goods is shown below.

The End