Production Possibilities Frontier (PPF):
- (micro) a graph that compares the production rates of two commodities that use the same fixed total of the factors of production.
- (macro) a graph that compares the production rates of two broad categories of output that use the same fixed total of the factors of production.
The PPF can demonstrate
- scarcity
- opportunity cost
- efficiency (productive and allocative)
- demonstrates the trade-off
- shape of the curve
law of Increasing opportunity cost: each additional increment of one good requires the economy to give up successively larger increments of the other good. - Resources for one good are not perfectly adaptable to other goods.
PPF and Efficiency - will tell us as a society if we are being efficient in the use of our resources.
- any combination on the frontier is efficient
- any combination inside the frontier is inefficient
- Outside the frontier is
- unattainable for now (micro)
- indicates an overextended economy (macro)
- trade
- new technology
- new resources
- increasing stock of capital goods
- new labor
- more productive labor
- natural disasters
- depletion of resources (supply shock)
- decrease in labor force (war)
- Efficiency means that some people will be unemployed.
- There are different kinds of unemployment.
- If you are at 100% you can't grow.
- New business needs a pool to hire from.
- Mis match. (People aren't employed on their skill sets.)
- Sometimes you don't have the people with the skills for the jobs needed.
- some people will be unemployed.
- 3-5% or 4-5% is "healthy" unemployment
- 8%, 9%, 10% = recession.
- 2-3% ="overextended" economy.
Efficiency does not mean 100% capacity. - You can't grow.
- Stuff will break, stuff will need replacing.
- What is efficient? 80-90% capacity
- See b and d on graph.
- Which has the higher potential for growth?
- B. (But we know that's not right. Soviet Model.)
