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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 1
Module 3

4. What You Will Learn in this Module
The importance of trade-offs in economic analysis
When the production possibilities curve model tells us about efficiency, opportunity cost, and economic growth
The two sources of economic growth—increases in the availability of resources and improvements in technology
Section 1 | Module 3

5. Trade-offs: The Production Possibility Frontier
Someone makes a trade-off when they give up something to get something else.
The production possibility frontier (PPF)
Illustrates the trade-offs facing an economy that produces only two goods.
Shows the maximum quantity of one good that can be produced for any given production of the other.
Section 1 | Module 3

6. The Production Possibility Frontier
Figure 3.1
Quantity of coconuts D 30
Feasible and
efficient
in production
Not feasible A 15
Feasible but
not efficient B 9
Production possibility frontier C
PPF 20 28 40
Quantity of fish
Section 1 | Module 3

7. Efficiency The PPF illustrates efficiency.
An economy is efficient if there is no way to make anyone better off without making at least one person worse off.
An economy is efficient in production if it produces at a point on its PPF.
An economy is efficient in allocation if it allocates its resources so that consumers are as well off as possible.
The PPF is a reminder that the true cost of any good is everything, in addition to money, that must be given up to get that good – the opportunity cost.
Section 1 | Module 3

8. Opportunity Cost
The PPF is a reminder that the true cost of any good is everything, in addition to money, that must be given up to get that good – the opportunity cost.
Section 1 | Module 3

9. Increasing Opportunity Cost
Figure 3.2
Quantity of coconuts
Producing the first
20 fish . . .
…requires giving up
5 coconuts 35
But producing
20 more fish . . . 30 A 25 20
…requires giving up
25 more coconuts… 15 10 5
PPF 10 20 30 40 50
Quantity of fish
Section 1 | Module 3

10. Economic Growth
Economic growth allows a sustained rise in aggregate output.
Economic growth is shown as an outward shift of the PPF.
There are two general sources of economic growth.
An increase in an economy’s resources.
Progress in technology.
Section 1 | Module 3

11. Economic Growth 10 20 25 30 40 50 35 15 5
Original
PPF
Quantity of coconuts
Quantity of fish
Figure 3.3
Production is initially at point A (20 fish and 25 coconuts),  it can move to point E (25 fish and 30 coconuts).
The economy can now produce more of everything.
Economic growth results in an outward shift of the PPF because production possibilities are expanded. E A
New
PPF
Section 1 | Module 3

12. Summary
One important economic model is the production possibility frontier.
The PPF illustrates: opportunity cost, efficiency, and economic growth.
There are two basic sources of growth: an increase in factors of production, and improved technology.
Section 1 | Module 3