w1 Topic 1b.introduction

TOPIC 1B
Production
Possibilities Frontier
Framework
©2016 Cengage Learning. All Rights Reserved. May not be scanned,

copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Learning Outcomes
 Define the production possibilities curve
(PPF).
 Plot and explain the types of PPF.
 Use the PPF to explain the seven basic

Economic concepts.
 List and explain the three types of economic

system.
Economic Activities
Two (2) types of economic activities:
1)Producing.
- Production possibilities frontier (PPF).
2)Trading.
- Exchange and trade.
Two (2) types of PPF:
1)The Straight Line PPF – constant

opportunity costs.
2) The Concave downward PPF – increasing

opportunity costs.
PRODUCTION POSSIBILITIES
FRONTIER
● Represents 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.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FRONTIER
CONSTANT OPPORTUNITY COSTS
 Part (a): The economy can produce
any of the five combinations of books
and shirts
 Part (b):The production possibilities
frontier (PPF) is a straight line
because the opportunity cost of
producing either good is constant.
 From point A to B to E Opportunity
cost of 1 book= 1 shirt. （点到点
计算机会成本 )
 Ratio is 1:1 ( no good to use for
explain opportunity cost)
FRONTIER
INCREASING OPPORTUNITY COSTS
 The production possibilities frontier in
part (b) is bowed outward because the
opportunity cost of producing coffee
makers increases as more coffee makers
are produced.
 Point A to B: Opportunity cost of 1
coffee maker= 1 cell phone.
 Point B to C:Opportunity cost of 1
coffee maker= 2 cell phones
 Point C to D : Opportunity cost of 1
coffee maker= 3 cell phones
LAW OF INCREASING OPPORTUNITY
COSTS
As more of a good is
produced, the
opportunity costs of
producing that good
Increase.
LAW OF INCREASING OPPORTUNITY
COSTS
Why?
Firms must employ resources which are
less efficient and / or appropriate when
increasing production.
In the real world, most PPF lines are

concave downward.
● When we increase the number of houses we

build from 60 to 70 ( extra 10 units), we
forfeit 5 units of Good X.
● When we increase the number of houses we

build from 110 to 120 ( also extra 10 units),
we forfeit 20 units of Good X.
PRODUCTION POSSIBILITY
FRONTIER
FRAMEWORK FOR
UNDERSTANDING
ATTAINABLE AND UNATTAINABLE
REGIONS AND PRODUCTIVE
EFFICIENCY
THE PPF AND VARIOUS ECONOMIC
CONCEPTS I
► (1) Scarcity is illustrated by the frontier
itself. Implicit in the concept of scarcity is
the idea that we can have some things but
not all things. The PPF separates an
attainable region from an unattainable
region.
► (2) Choice is represented by our having
to decide among the many attainable
combinations of the two goods. For
example, will we choose the combination
of goods represented by point A or by
point B?
CONCEPTS II
(3) Opportunity cost is most easily

seen as movement from one point to
another, such as movement from point
A to point B. More cars are available at
point B than at point A, but fewer
television sets are available. In short,
the opportunity cost of more cars is
fewer television sets.
(4) Productive efficiency is represented

by the points on the PPF (such as AE),
while productive inefficiency is
represented by any point below the
PPF (such as F ).
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duplicated, in whole or in part, except for use as permitted in a license distributed with
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PRODUCTIVE EFFICIENCY AND
INEFFICIENCY
Productive Efficiency
The condition where the maximum output is produced
with given resources and technology
Productive Inefficiency
The condition where less than the maximum output is
produced with given resources and technology.
Productive inefficiency implies that more of one
good can be produced without any less of another
good being produced.
UNEMPLOYED VS. EMPLOYED
RESOURCES
● When the economy exhibits productive inefficiency,
it is not producing the maximum output with the
available resources and technology. One reason may
be that the economy is not using all of its resources;
that is some resources are unemployed.
● When the economy exhibits productive efficiency it
is producing the maximum output with the available
resources and technology. That is its resources are
fully employed.
CONCEPTS III
► (5) Unemployment (in terms of

resources being unemployed)
exists at any productive
inefficient point (such as F ),
whereas resources are fully
employed at any productive
efficient point (such as AE).
ECONOMIC GROWTH WITHIN A PPF
FRAMEWORK
► An increase in resources or an
advance in technology can
increase the production
capabilities of an economy,
leading to economic growth
and shift outward in the
production possibilities
frontier.
TECHNOLOGY
► Technology is the body of

skills and knowledge involved
in the use of resources in
production
► An advance in technology
commonly refers to the ability
to produce more output with a
fixed amount of resources or
the ability to produce the same
output with fewer resources.
A politician says, “If you elect me, we can
get more of everything we want.” Under
what condition(s) is the politician telling
the truth?
SELFTEST
The first condition is that the economy is currently

operating below its PPF. It is possible to move
from a point below the PPF to a point on the PPF
and get more of all goods.
The second condition is that the economy’s PPF
shifts outward.
In an economy, only one combination of goods is
productive efficient. True or false? Explain your
answer.
SELFTEST
False. There are numerous productive efficient points, all of which
lie on the PPF.
The Economic Problem
The three basic questions facing all economic systems:
(1) What gets produced?
(2) How is it produced?
(3) Who gets it?
Given scarce resources, how do large, complex societies go

about answering the three basic economic questions?
Economic Systems
 Economic System: the way in which society

decides to answer key economic questions—in
particular those questions that relate to
production and trade.
 There are hundreds of countries but only TWO
major economic systems.
 We refer to these two major systems as
Socialism and Capitalism.
 Most Countries have Chosen Elements from
BOTH economic systems.
Mixed Capitalist Economies
 An economic system characterized by
largely private ownership of factors of
production, market allocation of
resources, and decentralized decision
making.
 Most activities take place in the private

sector in this system.
 Government normally plays a regulatory

role.

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TOPIC 1B

©2016 Cengage Learning. All Rights Reserved. May not be scanned,

 Plot and explain the types of PPF.

 Use the PPF to explain the seven basic

 List and explain the three types of economic

Two (2) types of economic activities:

1)The Straight Line PPF – constant

2) The Concave downward PPF – increasing

In the real world, most PPF lines are

● When we increase the number of houses we

● When we increase the number of houses we

(3) Opportunity cost is most easily

(4) Productive efficiency is represented

► (5) Unemployment (in terms of

► Technology is the body of

The first condition is that the economy is currently

(1) What gets produced?

(2) How is it produced?

(3) Who gets it?

Given scarce resources, how do large, complex societies go

 Economic System: the way in which society

 Most activities take place in the private

 Government normally plays a regulatory

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