Section 2.2 Production Possibilities Frontier (40)

Efficiency & Production Possibilities Frontier (PPF) How much can an economy produce with the resources available? What are the economy’s production capabilities? – To help consider these questions you need a simple model of the economy beginning with some ________________________.

Simplifying Assumption: The model limits output to two broad classes of products _____________ and ______________. Production during a given period- in this case a _______. The resources available in the economy are fixed in both ___________ & _______________. The ___________________ does not change. The point of following the assumptions is to _________ the economy’s resources and technology for a period of time to focus on what can possibly be produced during that time

PPF Model Production Possibilities Frontier shows the possible combinations of the two types of goods that can be produced when available resources are employed ___________________. Efficiency means producing the _______________ possible output from available resources. Points during the curve between A & F identify possible ________________ of the two goods that can be produced when the economy’s resources are used efficiently. – The model can also be used to show inefficient combinations and unattainable combinations.

Shape of the PPF – Any movement ____________ the PPF involves giving up some of one good to get more of the other – The law ___________________________ states that each additional increment of one good requires the economy to give up successively larger amounts of the other good Shifts of the PPF – PPF assumes resources and technology are _____________; over time shape of the PPF can shift outward or inward as resources levels and technology change – An ________________ shift of the PPF reflects economic growth which is an _________________ of the economy’s production possibilities or ability to produce.

– Changes in Resource Availability If the _________ force increases, or an increase of the availability of other _____________ or new _____________ that employs resources more efficiently = outward shift In contrast a decrease in the availability or quality of resources shifts the PPF _________________. – Increases in stock of capital goods The more capital goods an economy produces during one period the more ________ it can produce in the next period. Thus, producing more _______________ goods this period (building more factories) shifts the economies PPF outward for the next period. – Technological Change Another change that could shift the economy’s PPF outward is a ___________________ discovery that employs available resources more efficiently (for example, the internet).

Lessons from the PPF The first is ______________. – The PPF demonstrates the efficient combinations of output given the economy’s resources and technology The second is ______________. – Given the stock of resources and technology an economy can only produce so much The third is _________________. – As the economy produces more of one good it must produce less of the other good; the trade-off demonstrates opportunity cost

Lessons from the PPF (cont’d) The ___________ out shape of the PPF reflects the law of increasing opportunity cost. An ________________ shift of the PPF reflects economic growth. Because society must choose a specific combination of output along the PPF, the PPF emphasizes the need for ________________. Each point along the economy’s production possibilities frontier is an ____________ combination of output.