ECO 201 Ch 2 Production Possibilities Frontier Framework 1 The Production Possibilities Frontier PPF the possible combinations of two goods that can be produced in a certain period of time under the conditions of a given state of technology and fully employed resources a The Straight Line PPF Constant Opportunity Costs The economy can produce any of these five combinations of books and shirts The five combinations are plotted The production possibilities frontier PPF is a straight line because the opportunity cost of producing either good is constant Constant opportunity cost The opportunity cost of gaining 1 shirt is always 1 book b The Bowed Outward Concave Downward PPF Increasing Opportunity Costs The economy can produce any of these five combinations of cell phones and coffee makers The combinations are plotted The production possibilities frontier is bowed outward because the opportunity cost of producing coffee makers increases as more coffee makers are produced c Law of Increasing Opportunity Costs the PPF depends on whether opportunity costs are constant or increase as more of a good is produced law of increasing opportunity costs as more of a good is produced the opportunity costs of producing that good increase The shape of d Economic Concepts in a PPF Framework scarcity the condition where the wants for goods are greater than the resources available to satisfy them The PPF separates the production possibilities of an economy into two regions 1 Attainable all of the points on the PPF line itself and all points below it 2 Unattainable points above and beyond the PPF Productive Efficiency productive efficient the condition where the maximum output is produced with the given resources and technology is productive inefficient the condition where less than the maximum output produced with the given resources and technology Productive inefficiency implies that more of one good can be produced without any less of another good Unemployed Resources Economic Growth One reason for productive inefficiency is that the economy may not be using all of its resources that is some of its resources are unemployed economic growth refers to the increased productive capabilities of an economy Results in a shift outward in the PPF Two major factors that affect economic growth increase in the quantity of resources 1 2 advance in technology technology refers to the body of skills and knowledge involved in the use of resources in production An advance in technology commonly increase the ability to produce more output with a fixed amount of resources or the ability to produce the same output with fewer resources 1 ECO 201 Ch 2 Production Possibilities Frontier Framework 2 Specialization and Trade Can Move Us Beyond Our PPF a A Simple Two Person PPF Model Both Elizabeth and Brian would be better off if each specialized in producing only one of the two goods and trading it for the other In determining who should produce what look at the the comparative advantage comparative advantage the situation where someone can produce a good at a lower opportunity cost than someone else can Opportunity Costs for Elizabeth Opportunity Costs for Brian 1B 1A 1A 1B 1B 3A 1A 1 3B Elizabeth has a comparative advantage in producing bread and Brian has a comparative advantage in producing apples If they both specialize in these two goods and then trade 8 bread for 12 apples they are both better off 2