PPC Review, Economic Systems & Circular Flow Chapter 2

I. The Production Possibilities Frontier (curve) The PPC is an illustration of the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other.

The Production Possibility Frontier Quantity of coconuts Production possibility frontier A B D C Feasible and efficient in production Not feasible PPF Quantity of fish Feasible but not efficient

Increasing Opportunity Cost A PPF Producing the first 20 fish... …requires giving up 25 more coconuts… …requires giving up 5 coconuts But producing 20 more fish... Quantity of coconuts Quantity of fish

Economic Growth Economic growth results in an outward shift of the PPF because production possibilities are expanded. The economy can now produce more of everything. Production is initially at point A (20 fish and 25 coconuts),  it can move to point E (25 fish and 30 coconuts). A E New PPF Original PPF Quantity of coconuts Quantity of fish

PPC Practice Draw a PPC showing changes for each of the following: Pizza and Robots 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods 4. BP oil spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education

New robot making technology Q Q Robots Pizzas Question #1 A shift only for Robots

Decrease in the demand for pizza Q Q Robots Pizzas Question #2 The curve doesn’t shift! A change in demand doesn’t shift the curve

Mad cow disease kills 85% of cows Q Q Robots Pizzas Question #3 A shift inward only for Pizza

BP Oil Spill in the Gulf Q Q Capital Goods (Guns) Consumer Goods (Butter) Question #4 Decrease in resources decrease production possibilities for both

Faster computer hardware Q Q Capital Goods (Guns) Consumer Goods (Butter) Question #5 Quality of a resource improves shifting the curve outward

Many workers unemployed Q Q Capital Goods (Guns) Consumer Goods (Butter) Question #6 The curve doesn’t shift! Unemployment is just a point inside the curve

Significant increases in education Q Q Capital Goods (Guns) Consumer Goods (Butter) Question #7 The quality of labor is improved. Curve shifts outward.

II. Economic Systems The two general types of economic systems seek to address the economic problem in differing ways. In the market system, individual choice (desires of suppliers and demanders) is key to addressing the economic problem. In the command system, government direction (through central planning entities) is key to addressing the economic problem.

III. The Circular-Flow Diagram This is a model that represents the transactions in an economy by flows around a circle. It demonstrates the interdependence between households and businesses in a market economy. Some basic concepts: a)Household: A person or group of people that share their income. b)Business: Organization that produces goods and services for sale. Sometimes displayed as “firm” on this diagram. c)Firms sell goods and services in the product market. d)Firms buy resources they need to produce in the factor (or resource) market.

The Circular-Flow Diagram