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Production Possibilities Frontier

Production Possibilities Frontier. Chapter 1, Section 3. Recall. Opportunity cost is the value of the best forgone alternative. PPF. The production possibilities frontier (PPF) is a diagram that shows production combinations available to an economy given finite factor inputs and technology

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Production Possibilities Frontier

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  1. Production Possibilities Frontier Chapter 1, Section 3

  2. Recall • Opportunity cost is the value of the best forgone alternative

  3. PPF • The production possibilities frontier (PPF) is a diagram that shows production combinations available to an economy given finite factor inputs and technology • It is a model economists use to illustrate the concept of opportunity costs

  4. Simple Linear Model • Say you are a house painter and you and your crew can paint either 20 small houses or 10 large houses in a week. You can also paint a number of combinations of the two. • It takes the same amount of time to paint one large house as it does to paint 2 small houses.

  5. Simple Linear Model • So what is the opportunity cost of painting one large house? • What is the opportunity cost of painting two small houses?

  6. Simple Linear Model

  7. Simple Linear Model • We use these points on a graph to find the PPF 10 Large Houses 5 0 0 10 20 Small Houses

  8. Simple Linear Model • All points on the line are said to be efficient because they represent the maximum number of houses that can be painted with available resources and technology • You could paint any combination of houses on or inside the PPF

  9. Simple Linear Model • These points inside the model are attainable, but inefficient—you are not working up to your capabilities. • Points outside of the PPF are unattainable and cannot be reached due to the lack of resources required to reach those points. • You could increase your PPF if you increase your factors of production, or resources.

  10. Non Linear Model • Most real world examples are curved when they are put on a PPF. This is because of the law of increasing opportunity costs. • Law of increasing opportunity costs states that as the production of anything rises, the opportunity cost of forgone production will eventually increase. • It gets harder and harder to produce as you increase production. It will cost more.

  11. Non Linear Model Point C: Unattainble Must Increase Factors of Production to Reach Guns Point B: Efficient and Attainable Point A: Attainable but inefficient Butter

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