M1L3 Deciding What to Produce
Presentation
Production Possibility
Frontier
refers to the boundary between an attainable and unattainable
amount of production
It is a limit.
If goods X and Y are being produced, how many of good X can
you produce before you have to stop producing good Y?
PPF
Efficient
D
(Unattainable)
X
(Attainable but inefficient)
Economic Efficiency
refers to how closely an economy approaches its frontier.
In an efficient economy, the economy cannot produce one more
good without giving up some of another.
Input
refers to resources (LLCE) that are used to produce a good or
service
Output
refers to the goods and services that result from production
Resource
Increasing
opportunity cost
in order to gain more of one good you must give up increasing
amounts of another good
Lecture
Production
Possibilities Frontier
(PPF)
a set of all combinations of goods and services that are possible
in an economy given its resources and technology
Aggregate goods
goods that are a broad class of a type of good (a “basket” of
goods)
Consumption good
good or service that provides immediate satisfaction for its own
sake
Investment goods
capital; tools; goods that produce other goods, goods that are
intermediary goods
Investment
business spending (business purchases)
Production
table of data for PDF
Possibilities Schedule
I
PPS
C
I
0
100
100
75
50
150
50
25
170
25
0
180
0
PPF
100
75
40
80
120
160
NB. Increasing opportunity cost occurs because some
resources are better suited to the production of
consumption goods, while other resources are better
suited to the production of investment goods
C
Unattainable combinations represent the reality of scarcity.
Inefficient combinations represent unemployment or
underemployment
The downward slope represents opportunity cost
Slope = rise
∆I
run
∆C
If any of the variables that were previously held
constant (ceteris paribus) change, the whole curve
must be redrawn:
Example 1:
Improvement in technology increases production of investment
goods
I
bias shift
C
Example 2:
Economic growth results from the accumulation of resources,
which improves overall production
I
overall shift
C
Example 3:
the effect of war – overall output would be reduced because
resources are being occupied or destroyed
I
Example 4:
overall shift
C
increase in immigration – overall output would increase
because of increase in labor
I
overall shift
C
Example 5:
an improvement in technology for consumption goods –
increases the production of consumption goods
I
bias shift
C
Reading
Most PPF graphs are curved, showing that the cost of choosing
one option over another option increases as more resources are
devoted to it.
The graph curves outward to demonstrate the increasing costs.
If the options have equal costs, instead of being curved, the PPF
graph would be straight.
Lemons 10
7
# of trees
(space)
3
3
7
10 Limes