Module 3: The Production Possibility Frontier Model

Efficiency cont'd

.Although the ppf helps clarify what it means for an economy to be efficient in production, efficiency in production is only part of what's required for the economy as a whole to be efficient. ---Efficiency also requires that the economy allocate it's resources so that consumers are as well off as possible. If an economy does this, we say that it is efficient in allocation

Efficient

.An economy is efficient if there are no missed opportunities ---Meaning that there is no way to make some people better off without making other people worse off. .The ppf is useful for illustrating the general economic concept of efficiency. .Ex: (Classroom) Instead of using a small room for a lecture where some people have to sit on the floor, a professor could make us of the larger empty space for a lecture that allows everyone to have a seat. Not making use of the larger empty space would be inefficient. .When an economy is using all of its resources efficiently, the only way one person can be made better off is by rearranging the use of resources in such a way that the change makes someone else worse off. ---Ex: (Classroom) If all larger rooms were fully occupied, we could say the school was run in an efficient way; your classroom could be made better off only by making people in the larger room worse off-by moving them to the room that is too small.

(PPF) The Production Possibility Frontier model/curve

.Curve that shows the possibilities for production .Illustrates the trade-offs facing an economy that produces only two goods. .It shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced. .The idea behind this model is to improve ur understanding of trade-offs by considering a simplified economy that produces only two goods. ---This simplification allows us to show the trade-offs graphically .Helps clarify what it means for an economy to be efficient in production .Shows the amount that can possibly be produced if all resources are fully employed ---Ex: Changes in unemployment move the economy closer to or further away from the ppf

Economic growth

.Economists describe economic growth as creating a sustained rise in aggregate output. .One of the fundamental features of an economy .Economic growth means an expansion of the economy's production possibilities-the economy can produce more of everything. .Figure 3-3: Economic Growth (pg.19) ---Economic growth results in an outward shift of the ppc because production possibilities are expanded .There are basically two sources of economic growth ---Factor of production ---Advance in technology

Law of increasing costs

.In order to produce more the cost will go up

Comparative advantage

.Looks at who has the lowest opportunity cost

Model

.Representation of reality .Can become more complex representation of reality

Factors of production

.Resources used to produces goods/services

Aspects of the PPF

.The curve and shaded area=the production possibility curve .Points that lie inside the shaded area (C) or on the curve (A) are possible .Points that lie outside the curve are not possible (B) ---unless more resources are allocated and/or there are advances in technology

Law of Diminishing Returns

.The longer you do anything, the harder it gets .Ex: Running gets harder as you go

Advances in technology

.The technical means for the production of goods and services

Absolute advantage

.Who can make more

Trade-off

.You make a trade-off when you give up something in order to have something else