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Pitt ECON 0110 - Production Possibility Frontier
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ECON 0110 1st Edition Lecture 6Last lecture: we talked about three main economic systemsCurrent lecture: we talked about the production possibility frontier.PRODUCTION POSSIBILITY FRONTIERA two dimensional graph that shows all COMBINATIONS of TWO goods or services that can be produced if all of society’s resources are used efficientlyThe PPF illustrates the TRADE OFFS facing an economy that produces only two goods.Alternatively, it shows the MAXIMUM quantity of one good that can be produced for any GIVEN quantity of the other.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.ASSUMPTIONS ABOUT THE PPF1. Amount of resources is fixedTHE FACTORS OF PRODUCTION ARE:land or raw materialslaborcapital (plant & equipment)entrepreneurship2. State of technology is fixed3. We have full employment of all resourcesNo unemployment of laborNo excess capacity in factories4. We use all resources efficientlyPPF shows maximum output possibilities that are availablePoints outside the PPF are not possible given current resources and technologyPoints inside the PPF are inefficientBy better utilization of resources, we could achieve points on the PPFPPF ILLUSTRATES 1. Efficiency and full employment2. Choice3. Economic growth4. Opportunity cost (next section)1. CONCEPT OF EFFICIENCYPoints ON the frontier are efficientIf we are inside the PPF, we can increase production of one or both of the items by becoming more efficientWHY IS A COUNTRY INSIDE ITS PPF?Unemployment of laborUnderemployment of laborFewer hours than desiredInefficient utilization of skillsLack of full utilization of plant & equipmentInefficient allocation of resources2. CONCEPT OF CHOICESuppose we are on the PPFTo produce more of one item, we must give up some of the other itemAn economy can produce any combination of outputs on its PPFDifferent societies will probably choose different combinations of itemsEXAMPLE OF DIFFERENT CHOICES MADE BY SOCIETIES:USA vs. SOVIET UNIONUSA: Emphasis on production of consumption goodsUSSR: Emphasis on production of military goodsDIFFERENT CHOICES MADE BY SOCIETIES:CAPITAL GOODS VERSUS CONSUMPTION GOODSConsumption goods: food, clothes, cars, TVs, stereos, etc.Capital goods: factories, tractors, drill presses, etc.3. CONCEPT OF ECONOMIC GROWTH = Increase outputEconomic growth requires the PPF to SHIFT upward or to the rightOur ultimate goal is more output per personMore output per capita = Higher standard of livingMAJOR SOURCES OF GROWTH IN OUTPUT PER CAPITAMORE AND BETTER PHYSICAL CAPITALTools, computers, assembly lines, technologyResearch & developmentBETTER HUMAN CAPITALBetter and smarter workersEducation &


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Pitt ECON 0110 - Production Possibility Frontier

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