Production Possibility Frontier

1. Production Possibility Frontier

2. Let’s introduce the Production Possibilities Frontier • better known as the PPF. • The PPF is a basic workhorse in economics. • Important for understanding some basic issues in economics… like the use of resources. (Candy Activity) The Production Possibilities Frontier

3. The description of the best possible combinations of two goods to produce using all of the available resources. • Shows the trade-off between more of one good in terms of the other. • Tractors vs. Potatoes • Guns vs. Butter • We can’t have our cake and eat it too! The Production Possibility Frontier - What Is It?

4. The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative. • If we use all our resources to make potatoes, then we can’t make any tractors. • Our opportunity cost in this case is??????? • The slope of the Production Possibility Frontier measures the marginal opportunity cost of producing one good in terms of the amount of the other good foregone. • Let’s take a look at what this looks like in graph form. Opportunity Cost

5. The marginal opportunity cost of guns in terms of butter is increasing as we move down the PPF! We are makin’ more guns….but watch the spread on your english muffin!!!! The PPF is typically bowed-out or linear. It is not bowed-in Butter unattainable just attainable inefficient just attainable A Typical PPF Picture Guns

6. At point A, all resources are used for "other goods." Quantity of All Other Goods per Period Moving from point Ato point Brequires shifting resources out of other goods and into health care. 1,000,000 950,000 850,000 700,000 At pointF.all resources are used for health care. 500,000 400,000 100,000 200,000 300,000 400,000 500,000 Number of Lives Saved per Period A B C D E W Figure 1: The Production Possibilities Frontier F

7. According to law of increasing opportunity cost • The more of something we produce • The greater the opportunity cost of producing even more of it • This principle applies to all of society’s production choices Increasing Opportunity Cost

8. A slowdown in overall economic activity when resources are idle • Widespread unemployment • Factories shut down • Land and capital are not being used • An end to the recession would move the economy from a point inside its PPF to a point on its PPF • Using idle resources to produce more goods and services without sacrificing anything • Can help us understand an otherwise confusing episode in U.S. economic history Recessions

9. 1. Before WWII the United States operated inside its PPF . . . Military Goods per Period 2. then moved to the PPF during the war. Both military and civilian production increased. Civilian Goods per Period B A Figure 2: Production and Unemployment

10. What happens with new technology?

11. 1. A technological advance in saving lives increases this PPF's horizontal intercept . . . Quantity of All Other Goods per Period 4. or more lives saved and greater production of other goods. 3. The economy can end up with more lives saved and un-changed production of other goods . . . 2. But not its vertical intercept. Number of Lives Saved per Period A 1,000,000 J H 700,000 D Figure 3: The Effect of a New MedicalTechnology F F' 300,000 500,000 600,000