Production Possibilities Frontier

1. Production Possibilities Frontier Chapter 2 Section 2

2. PPF Model & Simplifying Assumptions • How much can an economy produce with the resources available? What are the economy’s production capabilities? • Simplifying Assumptions answers the questions above: • Limit the output to two broad categories: consumer goods and capital goods • Production is a given – a year • Resources are fixed in both quantity and quality • Knowledge about how to combine resources to produce output does not change during the year

3. 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.

4. Production Possibilities Frontier (PPF) Open to Page 42 in textbook to review graph and sketch below.

5. Inefficient and Unattainable Inefficient: does not produce the maximum possible output from available resources. (Point I) Unattainable: combinations that are unattainable given the resources and technology available. (Point U)

6. The Shape of the PPF Any movement along the PPF involves giving up some of one good to get more of the other. The shape of the PPF reflects the law of increasing opportunity cost Law of Increasing Opportunity Cost: states that each additional increment of one good requires the economy to give up successively larger increments of the other good.

7. Shifts of the PPF An outward shift in the PPF reflects economic growth, which is an expansion in the economy’s production possibilities or ability to produce. OR The economy’s ability to make stuff grows.

8. Shift of the PPF A decrease in the availability or quality of resources shifts the PPF inward.