ECONOMIC MODELS AND
UNEMPLOYMENT
Production Possibly Frontier (PPF)

The PPF model can be used to illustrate changes in
unemployment
Any point on the frontier
represents full employment
Increase in unemployment
A movement from the
frontier to a point inside the
curve shows underutilisation
of resources (workers) and
thus represents
unemployment
Capital
Goods
A
B
Consumer
Goods
PPF and unemployment
Decrease in Real
Output/Income
As an economy experiences a
downturn, real output falls.
A
B
As output falls the demand for
labour falls, thus increasing
unemployment levels.
Illustrated as a movement away
from the frontier line.
PPF and Unemployment
Decrease in productive
capacity
Less resources available to the
economy, thus there is a decrease in
potential output.
e.g. Emigration (people leaving) NZ
Showing by a shift inwards of the
PPF.
Work books page 166-169
AD/AS Model Revisited

AD/AS model shows the relationship between Price Levels
(inflation) and real output.
AS
PL*
AD
YF
Y*
Unemployment
The full employment line can be used
to show the gap between the output
that could be produced if we used
all the resources (workers etc.)
available to us and the output level
we are currently producing.
The gap between Y* and Yf demonstrates
the underutilisation of resources
(unemployment)
AD/AS Model and Unemployment

Decrease in AD – represents increased cyclical unemployment
called – Demand deficient unemployment
AS
e.g. Household spending falls – they spend less on
goods and services.
The demand for goods and services falls .
PL*
Shifts the AD curve left – Causes cyclical unemployment
to occur
PL1
y1Y*
AD’
YF
Unemployment
unemployment
AD
Fall in real output and increase in unemployment
AD/AS and Unemployment

Increased cyclical unemployment may be caused by
decreases in AS – called supply side unemployment
AS
AS
e.g. The cost of imported raw materials rises.
The rise of costs of production causes the AS
curve to shift to the left.
PL1
PL*
This results in a fall in real output and an
increase in unemployment (cyclical)
AD
y1Y*
YF
Unemployment
Unemployment
Workbook page 170-173