ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 3 The Production Possibility Frontier Model Krugman Wells The importance of tradeoffs in economic analysis When the production possibilities curve model tells us about efficiency opportunity cost and economic growth The two sources of economic growth increases in the availability of resources and improvements in technology 3 of 11 Trade offs The Production Possibility Frontier Someone makes a trade off when they give up something to get something else The production possibility frontier PPF Illustrates the trade offs facing an economy that produces only two goods Shows the maximum quantity of one good that can be produced for any given production of the other 4 of 11 The Production Possibility Frontier Figure 3 1 Quantity of coconuts D 30 Feasible and efficient in production A 15 9 Not feasible Feasible but not efficient B C Production possibility frontier PPF 0 20 28 40 Quantity of fish 5 of 11 Efficiency The PPF illustrates efficiency An economy is efficient if there is no way to make anyone better off without making at least one person worse off An economy is efficient in production if it produces at a point on its PPF An economy is efficient in allocation if it allocates its resources so that consumers are as well off as possible 6 of 11 Opportunity Cost The PPF is a reminder that the true cost of any good is everything in addition to money that must be given up to get that good the opportunity cost 7 of 11 Increasing Opportunity Cost Figure 3 2 Quantity of coconuts 35 requires giving up 5 coconuts Producing the first 20 fish But producing 20 more fish 30 A 25 20 requires giving up 25 more coconuts 15 10 5 PPF 0 10 20 30 40 50 Quantity of fish 8 of 11 Economic Growth Economic growth allows a sustained rise in aggregate output Economic growth is shown as an outward shift of the PPF There are two general sources of economic growth An increase in an economy s resources Progress in technology 9 of 11 Economic Growth Figure 3 3 Quantity of coconuts Economic The economy growth can results nowat point in anA 20 Production is initially outward produce more shift of ofthe everything PPF fish and 25 coconuts because it can production possibilities move to point E 25 fishare and 30 expanded coconuts 35 E 30 25 20 15 10 5 Original New PPF PPF 0 10 20 25 30 40 50 Quantity of fish 10 of 11 1 One important economic model is the production possibility frontier 2 The PPF illustrates opportunity cost efficiency and economic growth 3 There are two basic sources of growth an increase in factors of production and improved technology 11 of 11