Thinking Like an Economist, Part One: The PPF

Economics: efficient use of limited resources to maximize unlimited wants maximum efficiency achieved when it is not possible to produce more of one good without producing less of something else (ie. no waste)

Quantities of goods/services that can be produced are limited by available Land, Labour, Capital Implies that choices need to be made (what to produce, how, for whom, etc.)

Introducing the “P.P.F.” Model “model” = simplified version of reality PPF = “Production Possibilities Frontier” outer limit of an economy’s production assumes: a) economy only produces 2 goods b) amounts of Land, Labour, Capital (Tech.) are fixed

PPF marks boundary/limit between combinations of goods that can be produced and those that cannot with existing resources 100% production efficiency ONLY occurs at points that are ON the PPF “curve”

Case Study: Mark’s Jeans a single-firm economy 2 styles of jeans: Boot Cut & Straight Leg Max. production: 5000 pr./wk

Production Possibilities Schedule for Mark’ Jean’s Ltd. Possibility Straight Leg Boot Cut A 5000 B 4000 1000 C 3000 2000 D E F

Areas (combinations) above (right of) the curve are UNATTAINABLE given the current Land, Labour, Capital limits Areas below (left of) the curve represent INEFFICIENT/WASTED use of resources Producing on the PPF demonstrates the principle of OPPORTUNITY COSTS – production of 1 type can only be increased by producing less of the other type

At Mark’s Jeans, opportunity costs are constant – resources are easily transferred from one style of jean to another with little waste BUT What if the 2 products are very different from one another? Text p. 17 : Ploughs and Bread and the “Principle of Increasing Relative Cost”