Production Possibilities and Growth

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Production Possibilities and Growth Production Possibilities Frontier Economists, governmental officials, businesses, and individuals continually strive to increase…
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Production Possibilities and Growth Production Possibilities Frontier
  • Economists, governmental officials, businesses, and individuals continually strive to increase productivity and efficiency because an economy has limited resources which can be combined in various ways to produce a variety of goods and services.
  • Deciding what to produce requires choices and involves opportunity costs and tradeoffs for nations, individuals, and businesses.
  • Economists use a simple model to describe an economy’s possible production, current production, and potential production called the Production Possibilities Frontier or Production Possibilities Curve.
  • The model shows the possible combinations of the 2 types of goods that can be produced when available resources are employed fully and efficiently
  • Assumptions of a PPF
  • Production possibilities tables and curves are used to illustrate the economizing problem of scarcity. The curve and points on the line assume:
  • Nation/business is operating efficiently (full employment and full production).
  • Resources are fixed in quantity and quality.
  • Technology is constant during analysis.
  • Nation/business is producing only TWO types of products (ex/ farm products and manufactured goods).
  • It is possible to produce a combination of these two goods.
  • Resources available: Your business has 6 pieces of paper to produce either paper airplanes or paper footballs. What are your production possibilities? Footballs produce either paper airplanes or paper footballs. 6 5 4 3 2 1 0 0 1 2 3 4 5 6 Airplanes Deriving a PPF
  • Steps:
  • 1. Place each good on an axis
  • 2. Use the schedule to plot the points
  • 3. CONNECT THE DOTS to form a curve
  • Deriving a PPF produce either paper airplanes or paper footballs. Footballs
  • Steps:
  • 1. Place each good on an axis
  • 2. Use the schedule to plot the points
  • 3. CONNECT THE DOTS to form a curve
  • 6 5 4 3 2 1 0 0 1 2 3 4 5 6 Airplanes Footballs produce either paper airplanes or paper footballs. 6 5 4 3 2 1 0 0 1 2 3 4 5 6 Airplanes Deriving a PPF
  • Steps:
  • 1. Place each good on an axis
  • 2. Use the schedule to plot the points
  • 3. CONNECT THE DOTS to form a curve
  • Footballs produce either paper airplanes or paper footballs. 6 5 4 3 2 1 0 0 1 2 3 4 5 6 Airplanes Production Possibilities Frontier
  • Efficiency: producing the maximum possible output from available resources
  • The curve (the line) represents what isattainable and efficient
  • The points along the line represent maximum possible combinations of the two goods without new technology or growth
  • Note: Optimal or best product-mix will be some point on the curve, but the exact point depends on society; this is a normative decision.
  • Footballs produce either paper airplanes or paper footballs. 6 5 4 3 2 1 0 0 1 2 3 4 5 6 Airplanes Inefficient or Unattainable
  • I represents inefficient use of resources, but are attainable
  • Points inside the curve represent underemployment or unemployment of resource available to the society at that time
  • U represents unattainable combinations
  • Points outside the curve cannot be attained, the nation/business does not have the available resources to produce at that level.
  • U I Opportunity Cost and the PPF produce either paper airplanes or paper footballs.
  • Movement along line: The shape of PPF shows opportunity costs of producing more of one type of good over the other.
  • Straight or Bowed? produce either paper airplanes or paper footballs.
  • The PPF will be straight if the economy has resources that are perfectly adaptable to producing both goods
  • The PPF will be bowed out when resources in the economy are not all perfectly adaptable to the production of both types of goods
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