Chapter 2: The Production Possibilities Model

Attainable combinations

Points of the line/curve that fully employ available resources and technology and are efficient.

4 assumptions of a PPF for two outputs

1. The types and amounts of available resources are fixed 2. The technology used to produce the outputs is constant 3. Available resources are fully employed 4. Production is efficient.

Production possibilities frontier (PPF) or production possibilities curve

A graph illustrating the combinations of two types of output that can be produced by a society using the available resources and technology; represents the limits to what a society can produce at a given point in time.

Economic growth

A long-term process that permits increased production of goods and services and improved material standards of living

Law of increasing opportunity costs

A phenomenon encountered because resources are not equally well-suited to all types of production causing the PPF to bow outward. Example: Land

Production possibilities model

A simple way of portraying what outputs can be produced using an economy's current resources and technology.

Production possibilities schedule

A table that show some of the combinations of two outputs that can be produced from the above resources and current level of technology, assuming that resources are fully employed and production is efficient.

Technical efficiency

A type of efficiency demonstrated by the production possibilities model achieved when the economy is producing on its PPF because products are making as much output as they can with available resources.

Technical efficiency for an individual firm

Achieved by producing a given level of output with the fewest possible resources or by producing the maximum amount of output using a given amount of resources.

Unemployed and inefficient

Points inside the PPF indicates some resources are not being used or producing less than they can.

Outward shift of PPF

Direction that economic growth shifts the production possibilities frontier.

Economic efficiency or allocative efficiency

Efficiency in producing a good/service, as long as marginal benefit exceed marginal cost, stopping where MB=MC

Industry-specific growth

If the economy experiences an increase in the quantity or quality of resources used to produce the output or an improvement in technology in the output manufacturing sector

Achieving economic growth

Requires an increase in the quantity of resources (land, labor, capital, and entrepreneurial ability), an increase in the productivity of those resources, and/or improvement in technology.

Marginal rate of transformation (MRT)

The slope of the PPF and the measure of the opportunity cost of moving from one point to another along the curve.

Constant opportunity

When resources are equally well-suited to both types of production; when the slope of the PPF is straight