Section 2.2 Production Possibilities Frontier

1. Section 2.2 Production Possibilities Frontier (40)

2. Efficiency & Production Possibilities Frontier (PPF) • How much can an economy produce with the resources available? • What are the economy’s production capabilities? • To help consider these questions you need a simple model of the economy beginning with some ________________________.

3. Simplifying Assumption: • The model limits output to two broad classes of products _____________ and ______________. • Production during a given period- in this case a _______. • The resources available in the economy are fixed in both ___________& _______________ . • The ___________________ does not change. The point of following the assumptions is to _________the economy’s resources and technology for a period of time to focus on what can possibly be produced during that time

4. PPF Model • Production Possibilities Frontier shows the possible combinations of the two types of goods that can be produced when available resources are employed ___________________ . • Efficiency means producing the _______________possible output from available resources. • Points during the curve between A & F identify possible ________________of the two goods that can be produced when the economy’s resources are used efficiently. • The model can also be used to show inefficient combinations and unattainable combinations.

5. Shape of the PPF • Any movement ____________the PPF involves giving up some of one good to get more of the other • The law ___________________________states that each additional increment of one good requires the economy to give up successively larger amounts of the other good • Shifts of the PPF • PPF assumes resources and technology are _____________; over time shape of the PPF can shift outward or inward as resources levels and technology change • An ________________shift of the PPF reflects economic growth which is an _________________of the economy’s production possibilities or ability to produce.

6. Changes in Resource Availability • If the _________force increases, or an increase of the availability of other _____________or new _____________that employs resources more efficiently = outward shift • In contrast a decrease in the availability or quality of resources shifts the PPF _________________. • Increases in stock of capital goods • The more capital goods an economy produces during one period the more ________it can produce in the next period. • Thus, producing more _______________goods this period (building more factories) shifts the economies PPF outward for the next period. • Technological Change • Another change that could shift the economy’s PPF outward is a ___________________discovery that employs available resources more efficiently (for example, the internet).

7. Lessons from the PPF • The first is ______________. • The PPF demonstrates the efficient combinations of output given the economy’s resources and technology • The second is ______________. • Given the stock of resources and technology an economy can only produce so much • The third is _________________. • As the economy produces more of one good it must produce less of the other good; the trade-off demonstrates opportunity cost

8. Lessons from the PPF (cont’d) • The ___________out shape of the PPF reflects the law of increasing opportunity cost. • An ________________shift of the PPF reflects economic growth. • Because society must choose a specific combination of output along the PPF, the PPF emphasizes the need for ________________. • Each point along the economy’s production possibilities frontier is an ____________combination of output.