1. Production Possibilities Frontier
1st Economic Graph

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

3. 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

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

5. 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

6. . 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

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

8. 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

9. 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

10. 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….