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 . .