Macroeconomics Ch 2

What does the law of increasing costs have to do with a bowed-outward PPF?

A bowed-outward PPF is representative of increasing costs, because the PPF would not be bowed otherwise. To prove this statement, look back at Exhibits 1 and 2. In Exhibit 1, costs are constant (not increasing) and the PPF is a straight line. In Exhibit 2, costs are increasing and the PPF is bowed outward.

Increasing and Constant Opportunity Costs

A straight-line PPF represents constant opportunity costs: Increased production of a good comes at a constant opportunity cost. A bowed-outward (concave-downward) PPF represents the law of increasing opportunity costs: Increased production of a good comes at an increasing opportunity cost.

Increasing and Constant Opportunity Costs

A straight-line PPF represents constant opportunity costs: Increased production of a good comes at a constant opportunity cost. A bowed-outward (concave-downward) PPF represents the law of increasing opportunity costs: Increased production of a good comes at an increasing opportunity cost.

What does a straight-line PPF represent? What does a bowed-outward PPF represent?

A straight-line PPF represents the constant opportunity costs between two goods. For example, for every unit of X produced, one unit of Y is forfeited. A bowed-outward PPF represents increasing opportunity costs. For example, we may have to forfeit 1 unit of X to produce the 11th unit of Y, but we have to forfeit 2 units of X to produce the 100th unit of Y.

An Economy's Production Possibilities Frontier

An economy's PPF represents the possible combinations of two goods that the economy can produce in a certain span of time under the conditions of a given state of technology and fully employed resources.

Law of Increasing Opportunity Costs

As more of a good is produced, the opportunity costs of producing that good increase.

In an economy, only one combination of goods is productive efficient. True or false? Explain your answer.

False. Take a look at Exhibit 5. All of the numerous productive efficient points lie on the PPF.

Comparative advantage

In economics, a person who can produce a good at a lower cost than another person is said to have a comparative advantage in the production of the good.

Specialization, Trade, and the PPF

Individuals can make themselves better off by specializing in the production of the good in which they have a comparative advantage and then trading some of that good for other goods. Someone who can produce the good at a lower opportunity cost than another person can has a comparative advantage in the production of the good. By specializing in the production of the good for which they have a comparative advantage and then trading it for other goods, people can move beyond their PPF.

Specialization, Trade, and the PPF

Individuals can make themselves better off by specializing in the production of the good in which they have a comparative advantage and then trading some of that good for other goods. Someone who can produce the good at a lower opportunity cost than another person can has a comparative advantage in the production of the good. By specializing in the production of the good for which they have a comparative advantage and then trading it for other goods, people can move beyond their PPF.

The PPF and Various Economic Concepts

Scarcity is illustrated by the frontier itself. Implicit in the concept of scarcity is the idea that we can have some things but not all things. The PPF separates an attainable region from an unattainable region. Choice is represented by our having to decide among the many attainable combinations of the two goods. For example, will we choose the combination of goods represented by point A or by point B? Opportunity cost is most easily seen as movement from one point to another, such as movement from point A to point B. More cars are available at point B than at point A, but fewer television sets are available. In short, the opportunity cost of more cars is fewer television sets. Productive efficiency is represented by the points on the PPF (such as A-E), while productive inefficiency is represented by any point below the PPF (such as F). Unemployment (in terms of resources being unemployed) exists at any productive-inefficient point (such as F), whereas resources are fully employed at any productive-efficient point (such as any point in the range A-E).

The Production Possibilities Frontier and Various Economic Concepts

The PPF can be used to illustrate various economic concepts. Scarcity is illustrated by the frontier itself. Choice is illustrated by the fact that we have to find a point either on or below the frontier. In short, of the many attainable positions, one must be chosen. Opportunity cost is illustrated by a movement from one point to another on the PPF. Unemployed resources and productive inefficiency are illustrated by a point below the PPF. Productive efficiency and fully employed resources are illustrated by a point on the PPF. Economic growth is illustrated by a shift outward in the PPF.

Points to Remember

The PPF grounds us in reality. It tells us what is and what is not possible in terms of producing various combinations of goods and services. The PPF tells us that when we have efficiency (i.e., when we are at a point on the frontier itself), more of one thing means less of something else. In other words, the PPF tells us life has its trade-offs. If the PPF shifts rightward and the population does not change, then output per capita rises.

Technology

The body of skills and knowledge involved in the use of resources in production. An advance in technology commonly increases the ability to produce more output with a fixed amount of resources or the ability to produce the same output with fewer resources.

Productive Inefficient

The condition in which less than the maximum output is produced with the given resources and technology. Productive inefficiency implies that more of one good can be produced without any less of another being produced.

Productive Efficient

The condition in which the maximum output is produced with the given resources and technology.

A politician says, "If you elect me, we can get more of everything we want." Under what condition is the politician telling the truth?

The first condition is that the economy is currently operating below its PPF. It is possible to move from a point below the PPF to a point on the PPF and get more goods. The second condition is that the economy's PPF shifts outward.

Production Possibilities Frontier (PPF)

The possible combinations of two goods that can be produced during a certain span of time under the conditions of a given state of technology and fully employed resources.

Comparative Advantage

The situation in which someone can produce a good at lower opportunity cost than someone else can.

Economic Growth

The term economic growth refers to the increased productive capabilities of an economy. Economic growth is illustrated by an outward shift in the PPF. Two major factors that produce economic growth are an increase in the quantity of resources and an advance in technology.

The Production Possibilities Frontier

Think of yourself as being alone on an island. You can produce two goods and only two goods: coconuts and pineapples. Because your resources are limited, producing more of one good means producing less of the other. That type of thinking is the intuition behind the production possibilities frontier.

Unemployment

Unemployment (in terms of resources being unemployed) exists at any productive-inefficient point (such as F), whereas resources are fully employed at any productive-efficient point (such as any point in the range A-E).

law of increasing opportunity cost

each additional increment of one good requires the economy to give up successively larger increments of the other good

Scarcity

is illustrated by the frontier itself. Implicit in the concept of scarcity is the idea that we can have some things but not all things. The PPF separates an attainable region from an unattainable region.

Choice

is represented by our having to decide among the many attainaable combinations of the two goods. For example, will we choose the combination of good represented by point A or by point B?

Productive efficiency

is represented by the points on the PPF ( such as A-E), while productive inefficiency is represented by any point below the PPF ( such as F)

Opportunity cost

is the most easily seen as movement from one point to another, such as movement from point A to point B. More cars are available at point B than at point A, but fewer television sets are available. In short, the opportunity cost of more cars is fewer television sets.

PPF can be used to illustrate 7 economic concepts

scarcity, choice, opportunity cost, productive efficiency, unemployed resources, economic growth