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Production Possibilities Frontier

Production Possibilities Frontier. Frederick University 20 14. Production Possibilities Frontier. Assumptions There are only two goods needed and produced – Wine and Movies; There are no technological changes; The society makes a full use of its resources

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Production Possibilities Frontier

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  1. Production Possibilities Frontier Frederick University 2014

  2. Production Possibilities Frontier Assumptions • There are only two goods needed and produced – Wine and Movies; • There are no technological changes; • The society makes a full use of its resources = it uses its resources efficiently

  3. Production Possibilities Frontier 20 16 0 6 movies • In order to produce some movies, the society has to give up some wine: • It will transfer a part of resources from wine production to the movies production and will produce 16 units of wine and 6 movies A B choices

  4. IntroductionOpportunity cost • Opportunity cost is what is given up in order to get something else = the opportunity forgone when one makes an economic decision

  5. Production Possibilities Frontier WHY the quantity of movies might differ from the quantity of wine given up? • Resources do not fit equally to different activities

  6. Production Possibilities Frontier 20 16 12 0 6 10 movies • In order to produce more movies, the society has to give up some further wine: • It will transfer resources from wine production to the movies production and will produce 12 units of wine and 10 movies A C choices B

  7. Production Possibilities Frontier Why the quantity of movies rises just by 4 but not by 6 movies like in case B? The Law of increasing opportunity cost: If resources do not fit equally to different uses, every next transfer of resources is associated with lower extra productivity and with increasing opportunity cost per extra unit produced

  8. Production Possibilities Frontier Marginal opportunity cost = The opportunity cost per extra unit of output The opportunity cost of the first 6 movies are 4 units of wine • The opportunity cost of 1 movie = 2/3 of wine The opportunity cost of the next 4 movies are 4 units of wine • The opportunity cost of 1 movie = 1 unit of wine

  9. Production Possibilities Frontier 20 8 16 12 13 0 6 10 movies The opportunity cost of each extra movie is greater than before A C D choices B

  10. Production Possibilities Frontier Production Possibilities Curve W 20 A 16 B C 12 16 F 0 6 10 M

  11. Production Possibilities Frontier W A Efficient choices B N Unattainable choices G Inefficient choices M

  12. Production Possibilities Frontier Economic Growth – A shift in the PPF rightwards

  13. Production Possibilities Frontier Economic Growth W M

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