2.2%20Production%20Possibilities%20Frontier

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2.2 Production Possibilities Frontier

• How much can an economy produce with the
  resources available?
• What are the economys production capabilities?

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Simplifying Assumptions

• 1. To reduce the analysis to manageable
  proportions, the model the output to two broad
  classes of production Consumer goods, such as
  pizzas and haircuts, and Capital goods, such as
  pizza ovens and hair clippers.
• 2. The focus is on production during a given
  period- (ex. A year)
• 3. The resources available in the economy are
  fixed in both quantity and quality during the
  period.

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continued

• 4. Societys knowledge about how best to combine
  these resource to produce output-that is, the
  available technology-does not change during the
  year.
• Point of theses assumptions is to freeze the
  economys resources and technology for a period
  of time to focus on what possibly can be produced
  during that time.

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Production possibilities frontier

• Shows the possible combinations of the two types
  of goods that can be produced when available
  resources are employed fully and efficiently.
• Efficiency means producing the maximum possible
  output from available resources.

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Inefficient and unattainable production

• Inefficient production-
• Look on the board for the PPF Curve
• Law of increasing opportunity cost- states that
  each additional increment of one good requires
  the economy to give up successively large
  increments of the other good.

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continued

• The laws of increasing opportunity cost also
  applies when moving from the production of
  capital goods to the production of consumer
  goods.
• When all resources in the economy are making
  capital goods, certain resources such as cows
  farmland are of little use in making capital
  goods.

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Cont

• When resources shift from making capital goods to
  making consumer goods, few capital goods need be
  given up initially.
• As more consumer goods are produced, resources
  that are more productive in making capital goods
  must be used for making consumer goods reflecting
  the law of increasing opportunity cost.

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continued

• If resources were perfectly adaptable to the
  production of both types of goods, the amount of
  consumer goods sacrificed to make more capital
  goods would remain constant.
• The PPF would be a straight line, reflecting the
  constant opportunity cost along the PPF

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Shifts of the PPF

• Economic growth- an expansion in the economys
  production possibilities or stability to produce.
• Changes in Resources availability
• Work longer hours, retire later, or if the labor
  is more skilled the PPF shift outward (right)

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continued

• Increase in other available resources, such as
  new oil discoveries the shift of the PPF outward
  (right)
• Decrease in availability of quality of resources
  shifts the PPF inward (left)

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Increase in Stock of Capital Goods

• An economys PPF depends in part on its supply of
  the stock of capital goods.
• The more capital goods an economy produces during
  one period, the more output it can produce in the
  next period.
• Producing capital goods this period shifts the
  economys PPF outward (right) the next period.
• The choice b/w consumers goods and capital goods
  is really b/w present consumption and future
  production.

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Technological Changes

• Shifts the economys PPF outward is a
  technological discovery that employs available
  resources more efficiently.
• Ex. Internet, telephone, fax, email.
• Efficiency, the PPF describes the efficient
  combinations of outputs that are possible, given
  the economys resources and technology.

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continued

• The second is scarcity.
• Given the stock of resources and technology, the
  economy can produce only so much.
• The PPF slopes downward, indicating that,as the
  economy produces more of one good, it must
  produce less of the other good.
• Trade-off demonstrates opportunity cost.
• Bowed-out shape of the PPF reflects the law of
  increasing opportunity cost.

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continued

• Shift outward reflects economic growth.
• The PPF need choice.
• That choice will determine not only current
  consumption but also the capital stock available
  next.