What is an economic model?
It is a simplified representation of
economic activities, systems, or
problems
PRODUCTION
POSSIBILITY CURVES
What does the Production
Possibilities Frontier (Curve)
represent?
a) Opportunity Cost – what we give up to
produce something else
b) Efficiency – are we operating at our
maximum efficiency?
c) Underutilization – are we able to
produce more?
How do PPC’s affect the
individual?
Anyone can use PPC’s in
decision-making.
Ex.) You are holding a bake sale
and want to bake both brownies &
cookies. With the ingredients you
have on hand, you can see how
many cookies & brownies you can
make in graph form.
How do people use PPC’s?
Brownies
in dozens
Notice this is a straight line. Not all
ppc’s are a straight line.
4
3
2
1
1
2
3
Cookies in dozens
4
How do PPC’s affect industry?
Industries have a graphic
representation of what resources
they are utilizing and whether or
not they are working at efficiency.
They can also see their
opportunity cost of producing
more of one good over another
How does industry use
PPC’s?
Fans
Represented in millions
16
12
8
4
1
2
3
Alarm clocks
4
WE MAKE FOUR
ASSUMPTIONS WHEN
DEALING WITH PPC’s:
1. All resources are fixed.
There are no more resources available for
use in production.
5=
2. All resources are fully employed.
= Full Production
You are using every resource available to
you for your production.
3. Technology is fixed.
The technology you are using for production
is the best technology you have
available to you.
4. You can only produce two goods.
For the sake of graphing the curve, you can
only produce two goods.
http://www.classzone.com/cz/books/econ_
cnc/resources/htmls/animated_econ
omics/ec01_anim_learnppc.html
Let’s look at sweaters & bread
in industry:
Bread
50
40
30
20
10
0
10
20
30
40
Sweaters
Findings: The line drawn represents the limits or
“ FRONTIER “ an industry can operate in.
Let’s look at shoes & DVD’s in
personal consumption:
DVD’s
25
20
15
10
5
0
1
2
3
4
5
Shoes
Findings: The line drawn represents the limits or
“ FRONTIER “ an individual can operate in.
Now let’s look at Opportunity
Cost in an Industry Table:
RULE 1:
You
move
from
point to
point.
Start with
A.
POINT
BREAD
SWEATERS
A
0
35
OPPORTUNITY
COST
0 sweaters
B
10
32
3 sweaters
C
20
27
5 sweaters
D
30
20
7 sweaters
E
40
11
F
50
0
9 sweaters
11 sweaters
RULE 2:
You are calculating for sweaters
Now let’s look at Opportunity
Cost in an Individual Table:
RULE 1:
You
move
from
point to
point.
Start with
A.
POINT
DVD’s
Shoes
A
20
0
OPPORTUNITY
COST
0 DVD’s
B
18
1
2 DVD’s
C
15
2
3 DVD’s
D
11
3
4 DVD’s
E
6
4
F
0
5
5 DVD’s
6 DVD’s
RULE 2:
You are calculating for DVD’s
What else does production possibilities
frontier tell us?
K
J
At point K – IMPOSSIBLE
At point J – UNDERUTILIZATION
At any point on the curve – EFFICIENCY
What two factors can change
the Production Possibilities
Frontier?
a. New or better technology/labor
b. New resources become available
Earthquake hits California.
California companies PPF
New oil reserves found in
Alaska
Oil industry PPF
New machine on assembly line cuts the
time of making tires by 2 minutes each.
Tire industry PPF
Opportunity Costs are
increased by switching from
producing one product to
another.