2 The Production Possibilities Frontier Let’s introduce the Production Possibilities Frontierbetter 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. PotatoesGuns vs. ButterWe 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-inButterjust attainableunattainableinefficientjust attainableA Typical PPF PictureGuns
6 Figure 1: The Production Possibilities Frontier Number of Lives Saved per PeriodQuantity of All Other Goods per Period100,000200,000300,000400,000500,0001,000,000950,000850,000700,000At point A, all resources are used for "other goods."AMoving from point A to point B requires shifting resources out of other goods and into health care.BCDAt point F. all resources are used for health care.WEFLieberman & Hall; Introduction to Economics, 2005
7 Increasing Opportunity Cost According to law of increasing opportunity costThe more of something we produceThe greater the opportunity cost of producing even more of itThis principle applies to all of society’s production choicesLieberman & Hall; Introduction to Economics, 2005
8 RecessionsA slowdown in overall economic activity when resources are idleWidespread unemploymentFactories shut downLand and capital are not being usedAn end to the recession would move the economy from a point inside its PPF to a point on its PPFUsing idle resources to produce more goods and services without sacrificing anythingCan help us understand an otherwise confusing episode in U.S. economic historyLieberman & Hall; Introduction to Economics, 2005
9 Figure 2: Production and Unemployment 1. Before WWII the United States operated inside its PPF . . .Civilian Goods per PeriodMilitary Goods per Period2. then moved to the PPF during the war. Both military and civilian production increased.BALieberman & Hall; Introduction to Economics, 2005
11 Figure 3: The Effect of a New Medical Technology Number of Lives Saved per PeriodQuantity of All Other Goods per Period2. But not its vertical intercept.4. or more lives saved and greater production of other goods.A1,000,0003. The economy can end up with more lives saved and un-changed production of other goods . . .JH700,000D1. A technological advance in saving lives increases this PPF's horizontal intercept . . .FF'300,000500,000600,000Lieberman & Hall; Introduction to Economics, 2005
Your consent to our cookies if you continue to use this website.