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Production Possibility Frontier. The Production Possibilities Frontier Lets introduce the Production Possibilities Frontier better known as the PPF. The.

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Presentation on theme: "Production Possibility Frontier. The Production Possibilities Frontier Lets introduce the Production Possibilities Frontier better known as the PPF. The."— Presentation transcript:

1 Production Possibility Frontier

2 The Production Possibilities Frontier Lets 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)

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 cant have our cake and eat it too!

4 Opportunity Cost 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 cant 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. Lets take a look at what this looks like in graph form.

5 A Typical PPF Picture Guns Butter unattainable inefficient just attainable 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

6 Lieberman & Hall; Introduction to Economics, Figure 1: The Production Possibilities Frontier Number of Lives Saved per Period Quantity of All Other Goods per Period 100,000200,000300,000400,000500,000 1,000, , , , , ,000 B A C D E F W At point A, all resources are used for "other goods." Moving from point A to point B requires shifting resources out of other goods and into health care. At point F. all resources are used for health care.

7 Lieberman & Hall; Introduction to Economics, 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 societys production choices

8 Lieberman & Hall; Introduction to Economics, 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

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

10 What happens with new technology?

11 Lieberman & Hall; Introduction to Economics, Figure 3: The Effect of a New Medical Technology Number of Lives Saved per Period Quantity of All Other Goods per Period 300,000500,000600,000 1,000, ,000 A J D H F 1.A technological advance in saving lives increases this PPF's horizontal intercept... 4.or more lives saved and greater production of other goods. 3.The economy can end up with more lives saved and un-changed production of other goods... 2.But not its vertical intercept. F'


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