Production Possibilities Frontier
1st Economic Graph
Branches of Economics
• Microeconomics looks at individual parts of economy:
– How households & firms make decisions and interact in
specific markets
• Macroeconomics looks at the entire economy:
– Economy-wide phenomena including: inflation, unemployment,
interest rates & GDP (economic growth)
Production Possibilities Frontier
• Illustrates the full potential output of an economy & the
tradeoff between producing only 2 goods (opportunity cost)
– Assumptions:
– country uses all resources (factors of production)
– country produces only 2 goods
Bowed Line:
Straight Line:
Constant opportunity cost
Increasing opportunity cost
Constant Cost PPF Graph
Qty
Food
.
(0,100)
.
.
Any point above line is
Unobtainable in Short Run
with existing technology &
resources
C
B
(50,50)
Any point on line is Efficient
production of goods
A
(100, 0)
Any point below line is Inefficient
i.e. Below full potential, wasting resources
i.e. @ full potential
@ full employment
Qty
Shelter
(5.0% for USA)
Which Society is more EFFICIENT?
Assumptions: -produce only 2 goods
-same resources for both countries
Country A
Country B
Straight Line PPF
• Slope = Opportunity Cost
Food
10
5
.
A
What is the Opportunity Cost
of moving from point A → B ?
.
---------- B
-----------
Qty
5
10
Qty
Shelter
“Bowed” PPF Curve
Quantity
Houses
1,000
.
Opp. cost of moving from Point A  B
Opportunity Cost of gaining 400 Cars is 100 Houses
Gain 1 Car  Give up 1/4 House
A
-------------------------------
B
900 --------------
700
0
400
Move from Point B  C
Opportunity Cost of gaining 400 Cars is 200 Houses
Gain 1 Car  Give up 1/2 House
C
Increasing Opportunity
Cost!
800
1,000
Quantity
Cars
Economic Goal:
Shift PPF outward
Qty of
Computers
4,000
Increased Efficiency (productivity)
will shift PPF curve outward
3,000
2,300
2,200
0
G
A
600 650
You get more from
same scarce resources!
1,000
Qty of
Cars
PPF Multiple Choice Questions
• PPF Line represents all efficient production points
– Society’s full potential to produce goods & services
• Points below PPF are inefficient (not using resources fully)
• Points above PPF are not attainable in short run
– Cannot attain it with existing technology & resources
• “Bowed” PPF curves have increasing opportunity cost
• Straight Line PPF curves have constant opportunity cost
• Long Run goal is to shift the line outward
–
(raise full potential)
How?: Discover new resources, improve technology, expand labor force, improve human capital etc….
2 Worksheets: PPF Analysis
Qty
Food
.
(0,100)
.
.
C
B
(50,50)
A
(100, 0)
Qty
Shelter
.
.