Unit 1: Basic Economic Concepts - Production Possiblities Graph

January 18, 2018

Production Possibilities Graph

• Production Possibilities Graphs [PPG, PPC (curve), or PPF (frontier)] 
• Show alternate ways to use resources
• Shows the most that society can produce if it uses every available resource to the best of its ability.
• Key Assumptions: 
1. Full Employment
• 80 - 90% factor capacity
• 4 -5% unemployment rate
2. Productive Efficiency
3. Fixed Resources
1. Land
2. Labor
3. Capital
4. Fixed Technology
5. No international trade
6. 2 goods produced
   

• Point A: Attainable, but inefficient
• Point B, C, and D: Attainable and efficient
• Point X: Unattainable

• Movements of PPG:
• Inside of the Curve: 
• Located on Point A
• Attainable, but inefficient
• Unemployment- have resources but no people OR have people but no resources
• Underemployment
• Underutilization
• Recession
• Along the Curve/ Frontier:
• Located on Point B (more production of guns than butter), D (equal production of guns and butter), And C (more production of butter than guns)
• Attainable and efficient
• Can shift along the curve
• Shifts of the Curve:

• Opportunity Cost: Next best alternative that you must give up in order to get something else.
• Law of Increasing Opportunity Cost: As you produce more of one good, the opportunity costs (the forgone production of another good) will increase.
• Concave VS. Constant PPG: 
• Concave PPG:
• Shows Growth

• Constant PPG: 
• Stays the same

• Productive VS. Allocative Efficiency:
• Productive Efficiency: Products are being produced in a least costly way.
• Allocative Efficiency: Products being produced are the ones most desired by society.