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Econ C.2 PPF - Textbook notes
Principles Economics (Tufts University)
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Production Possibilities Frontier (PPF)
● Shows ​maximum ​output​ allocation​ society can produce by given technology and input of
resources
● Assumptions of PPF
○ 1. Society only produces two outputs
○ 2. There is only one input
○ 3. Technology is fixed
○ 4. Individual workers are identical in skill, education, and ability
● Productivity measures: ratio of how much input is put in in order to yield an output
○ Use this to find amount of output produced when given amount of input
● Y-axis good #1 v. x-axis good #2
○ Points of PPF are efficient b/c this means society is fully utilizing resources to produce
goods
○ Points under PPF curve are possible but inefficient b/c not fully utilizing resources
■ I.e ​unemployment
○ Points above PPF curve are not possible because this amount of output requires more
input that exceed society’s current avaliable resources
● Calculate​ Whether a Point is Possible on PPF
○ 1. Identify coordinates of point (x,y)
○ 2. Use equation
(x)(productivity measure good #1) + (y)(productivity measure good #2) = total input
●
●
■ x is amount of output of good #1
■ y is amount of output of good #2
○ If value is less than or equal to total input, then it is possible
Slope of PPF represents ​opportunity cost​ of ​shifting resource​ for one good​ in order to gain a
quantity of another good
■ b/c resources are limited in the society —> scarcity
○ This represents there is a ​tradeoff​ when producing more goods b/c give up another
good
○ Opportunity cost of good #1 and good #2 are inverses
■ Original slope is opportunity cost of good #1 is (##quantity) of good #2
● This means in order to produce one more of good one, z more of good
#2 is sacrificed
■ Inverse of original slope is opportunity cost of good #2 is (##quantity) of good #1
● This means in order to produce one more of good two, z more of good
#1 is sacrificed
PPF line shifts outward in times of ​economic growth
○ Includes ​additional resources or input value and improvement in technology,
○ Points may shift inside our onto PPF when ​decreased unemployment
■ Decrease in unemployment itself doesn’t shift the curve out. It may shift points
from under PPF to ​on​ PPF b/c now fully utilizing resources
○ In either industries will increase production of PPF
○ When assumption #2 no longer holds
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●
Shape of PPF
○ Linear— constant opportunity cost
○ Bowed outward— increasing opportunity cost
■ b/c slope of tangent becomes larger
■ A.k.a opportunity cost for producing good #1 becomes greater because more
resources of good #2 is being shifted
○ PFF bowed outwards when…
■ 1. Different workers have different skills
■ 2. Different opportunity cost of producing one good in terms of the other
■ 3. There’s a mix of resources with varying opporunity cost
○ When there is better technology in only one industry, that ONLY end of PPF will shift up
or right
■ There’s a shift because improved technology allowed less labor hours with the
same resulting output
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