1. Production Possibility Frontier

2. 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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. What happens with new technology?

11. 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