or… production possibilities curve (ppc ) production possibilities frontier (ppf)
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Or…Production Possibilities Curve (PPC)
Production Possibilities Frontier (PPF)
Resources: The Factors of Production
• Economists classify resources into 4 categories1.Land
1.Natural resources2.The payment for Land is RENT
2.Labor1.Human resources2.The payment for Labor is WAGES
3.Capital (a product of Investment)1.Tools, machines, factories2.The payment for Capital is INTEREST
4.Entrepreneurship The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit The payment for Entrepreneurship is PROFIT
The Fundamental Problem of Economics: Scarcity
• People have unlimited wants but the resources to satisfy those wants are scarce.
• Therefore, we must make choices about how to use our scarce resources. We face trade-offs when it comes to using available resources.
• Ex. Assume flour is a scarce resource: 3 cups of flour can be used to make a loaf of bread or a cake, but the 3 cups cannot be used to make both.
The Fundamental Problem of Economics: Scarcity
OR
Opportunity Cost• Once a resource or factor of production has been put to
productive use an opportunity cost is incurred.
• Opportunity cost is the next best alternative use for a resource.
• Ex. If the 3 cups of flour are used to bake bread, then the opportunity cost is the cake that could also have been baked with the 3 cups of flour.
• No matter what we do with our time or resources, we always incur opportunity cost. TINSTAAFL.
TINSTAAFL
There is no suchthing as a free
lunch.
TINSTAAFL
Everything has a cost.
TINSTAAFL Illustrated: The PPC
• The PPC = The Production Possibilities Curve
• The PPC = a graph showing all of the possible combinations of output for an economy fully employing all of its resources in producing 2 goods.
(DRAW) TINSTAAFL Illustrated: The PPC
Production Possibilities Model
• Assumptions:oFull employmentoFixed resourcesoFixed technologyoTwo goods
1-10
Possibilities Curve Production
Individual’s Economizing Problem
• Limited income• Unlimited wantsA Budget Line• Tradeoffs & opportunity costs• Make best choice possible• Change in income
1-12
A Budget Line/Frontier
6543210
02468
1012
DVDs$20
Books$10
12
10
8
6
4
2
0
2 4 6 8 10 12 14
$120 Budget
Income = $120
Pdvd = $20= 6
Income = $120
Pb = $10= 12
Attainable
Unattainable
Quantity of Paperback Books
Quantity of DVDs
1-13
PPF Points: Efficient, Inefficient, & Impossible • An outcome is said to be efficient if the economy is
getting all it can from the scarce resources it has available.
• Points On (rather than inside) the production possibilities frontier represent efficient levels of production. When the economy is producing at such a point, there is no way to produce more of one good without producing less of the other.
• Points Inside. Represents an inefficient out-come. For some reason, perhaps widespread unemployment, the economy is producing less than it could from the current available resources.
• Points Outside. Represents the future and are not currently possible with the resources available, or impossible.
Production Possibilities Curve
Pizzas
Industrial Robots
Attainable
0 1 2 3 4 5 6 7 8 9
1413121110987654321
Unattainable
AB
C
D
E
Law of IncreasingOpportunity Cost
A’
B’
C’
D’
E’
Shape of the Curve
1-15
CAPITAL
CONSUMER
Future Possibilities
Goods for the Present
Goods for the Future Goods for the Future
Goods for the Present
P
F
CurrentCurve
CurrentCurve
FutureCurve
FutureCurve
Presentville Futureville
1-16
Law of Increasing Opportunity Cost: As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
Rationale: Economic resources are not completely adaptable to alternative uses. Many resources are better at producing one type of good than at producing others.
Pizzas
Robots
A
B
C
D
Italy's PPC
109876543210
20 40 60 80 100 120 140 160 180 200
increasing opportunity cost
Pizzas
Robots
Italy's PPC
109876543210
20 40 60 80 100 120 140 160 180 200
A
B
C
D
constant opportunity cost
Pizzas and Robots:Assume Italy was producing 200 pizzas and 0 robots. Surely, many of the resources (land, labor and capital) being used to make pizzas would be better suited to making robots. As Italy starts making its first two robots it has to give up very few pizzas, since only those resources that are suited for robot production will be used. At first, 2 robots "cost" Italy only 5 pizzas. But as the country makes more and more robots, the opportunity cost increases, because at some point pizza makers will have to build robots. As Italy approaches 10 robots, the opportunity cost of the last two robots is 130 pizzas, as resources better suited for pizza production are employed in robot factories.
Production Possibilities Curve Shape?
The Production Possibilities Curve
1) Which point(s) are attainable and desirable? ·Points on the PPC (A, B and C) are attainable through full employment, and thus desirable because they represent efficient use of Italy's resources.
2) Which point(s) are attainable but not desirable? ·Point D is inside the PPC, thus represents inefficient use of resources, and most likely high unemployment, and is thus undesirable.
3) Which point(s) are unattainable? Is this point desirable? ·Point E is beyond Italy's production possibilities and is thus unattainable. It is desirable because it represents greater consumption of both pizzas and robots.
4) Which point will mean more consumption in the future?·Point A represents more consumption in the future, because Robots are a capital good, used to make other products for consumption. If Italy produces more robots now, it may mean more consumer goods in the future.
5) Which point means more consumption now?·Point C because pizza is a consumer good. Households don't buy and use robots, but they do like to eat pizzas.
6) Why is the PPC bowed outwards?·The Law of Increasing Opportunity Cost
Pizzas
Robots
A
B
C
D
65 130 195
E
2
7
9
Italy's PPC10
REVIEW:Production Possibilities Frontier• Production Possibilities Frontier
o A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Specific Locationso Points On Frontier Line?o Points Outside?o Points Inside?
Optimal Allocation of Resources: THE RULE: MB=MC (Equilibrium Point)
15
10
5
0
1 2 3
a
b
c
d
e
MB = MC
MC
MB
Quantity of Pizza
Marginal Benefit & Marginal Cost
1-20
MB = Marginal Benefit
MC= Marginal Cost
MB=MC RULE• Marginal Cost
o The opportunity cost of producing one more unit of a good or service.
o The marginal cost of producing a good increases as more of the good is produced.
• Marginal Benefito The benefit that a person receives from
consuming one more unit of a good or service.o The marginal benefit from a bottle of water is the
number of CDs that people are willing to forgo to get one more bottle of water.
o Marginal benefit decreases as more bottled water is available.
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