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Understanding Production Possibility Frontiers and Market Dynamics in Economics

This comprehensive guide explores key concepts in economics, focusing on Production Possibility Frontiers (PPFs) for goods X and Y, comparing increasing and constant opportunity costs. It delves into supply and demand models, examining determinants such as taste, related goods, technology, and input costs. The text also addresses market welfare, consumer surplus, and producer surplus, illustrating concepts through graphical representations. Additional topics include the behavior of perfectly competitive firms, monopolies, oligopolies, and the impact of externalities on market efficiency.

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Understanding Production Possibility Frontiers and Market Dynamics in Economics

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  1. Models in AP Economics adapted from Sally Meek Sally.meek@pisd.edu

  2. Production Possibility Frontier or Curve Increasing Cost

  3. Increasing opportunity costs Good X Good Y Production Possibility Frontier

  4. Production Possibility Frontier or Curve Constant Cost

  5. Constant opportunity costs Good X Good Y Production Possibility Frontier

  6. Radios Radios Country B Country A 3 2 12 4 Wheat Wheat Using PPFs and comparative advantage

  7. Comparative Advantage Matrix

  8. Supply and Demand Model

  9. P S P1 D Q Q1 Supply and Demand Model

  10. Determinants of Demand and Supply

  11. Demand • Changes in: • Taste and preference • Related Goods: • Δ in prices = Δ in demand for other goods • complements or substitutes • Income • Buyer numbers • Expectations • Supply • Changes in: • Technology • Related Goods: • Δ in prices = Δ in • supply of other goods • complements or • substitutes • Input Costs • Competitor numbers • Expectations Non-price determinants

  12. Market Welfare CS=consumer surplusPS=producer surplus

  13. P S CS P1 PS D Q1 Q Market Welfare CS=consumer surplusPS=producer surplus

  14. Cost Curves

  15. P ATC MC AVC Q Cost structure for a firm

  16. Perfectly Competitive Firm

  17. $ ATC MC P MR=d AVC P1 MR=d1 P2 MR=d2 Q loss Q profit Q The Firm – Perfect competition

  18. The Market and the PC Firm in the short run

  19. P P S MC ATC P MR=d ATC D Q Q Q Q The Market and the PC Firm inthe short run

  20. The Market and the PC Firm in the long run

  21. P P MC S1 LRATC P1 MR=d1 D Q1 Q1 Q Q The Market and the PC Firm in the long run: no economic profits

  22. LRATC

  23. $ LRATC Q The Firm

  24. Monopoly Firm

  25. P P MC ATC ATC D MR Q Monopoly Q

  26. Monopolistic Competitive Firm Short Run

  27. P MC P ATC ATC D MR Q Monopolistic Competitionshort run

  28. Monopolistic Competitive Firm Long Run

  29. P MC P=ATC LRATC D MR Q Monopolistic Competitionlong run

  30. Blue Mart North South North $900, $1,800 $3,000, $3,500 Red Shop South $5,000, $4,000 $1,500, $1,000 1st entry in cell is Red Shop’s daily profits and 2nd entry is Blue Mart’s Oligopoly and game theory

  31. Blue Mart North South North $900, $1,800 $3,000, $3,500 Red Shop South $5,000, $4,000 $1,500, $1,000 1st entry in cell is Red Shop’s daily profits and 2nd entry is Blue Mart’s Oligopoly and game theory

  32. Factor Market—Perfect Competition Market and Firm

  33. W W S labor W S=MRC D labor MRP=d Q Q Q labor Q labor Perfect Competition in the Factor Market

  34. Factor Market—Monopsony

  35. MRC W S W1 MRP q1 Q labor Monopsony

  36. Externalities Negative Externality and Internalized Scenario

  37. MSC P MPC dwl MPB Q Qm Qs Negative production externality ExternalitiesQm=market quantityQs =Socially optimal quantity

  38. Externalities Positive Externality and Internalized Scenario

  39. P MPC dwl MSB MPB Qm Qs Q ExternalitiesQm=market quantityQs =Socially optimal quantity Positive consumption externality

  40. $ MC or MSC MB or MSB Q Q Allocative efficiency Allocative Efficiency

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