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Production Possibilities Function

Production Possibilities Function. Unit One, Lesson 4. Recall. Opportunity cost is the value of the best forgone alternative, you give up what you decide not to do. PPF. The production possibilities frontier (PPF) is a diagram that shows opportunity costs

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Production Possibilities Function

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  1. Production Possibilities Function Unit One, Lesson 4

  2. Recall • Opportunity cost is the value of the best forgone alternative, you give up what you decide not to do

  3. PPF • The production possibilities frontier (PPF) is a diagram that shows opportunity costs • Resources available to an economy are limited • 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 just use these points on a graph to find the PPF 10 Small Houses 5 0 0 10 20 Large Houses

  8. Simple Linear Model • All points on the curve 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. Breaks can kill a business

  10. 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.

  11. 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.

  12. 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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