Arnold - Econ13e - Ch02 Production Possibilities Frontier

CHAPTER
2
PRODUCTION
POSSIBILITIES
FRONTIER
ECONOMICS FRAMEWORK
Roger A. Arnold • Thirteenth Edition
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
©Sashkin/Shutterstock
2-1 The Production Possibilities Frontier
2-2 Specialization and Trade Can Move Us

Beyond our PPF
2
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©SashkinShutterstock
2-1 The Production Possibilities Frontier(1 of 6)
• Think of yourself as being alone on an island

• You can produce two goods only: coconuts and pineapples
• Because your resources are limited, producing more of one
goods means producing less of the other
• That type of thinking is the intuition behind the production
possibilities frontier
• Keep that intuition in mind as we proceed
3
• 2-1a The Straight-Line PPF: Constant Opportunity Costs

• Production Possibilities Frontier (PPF): The possible
combinations of two goods that can be produced during a
certain span of time under the conditions of a given state of
technology and fully employed resources
• Notice that the PPF is a straight line; this is because the
opportunity cost of books and shirts (Exhibit 1) is constant
– Straight-Line PPF = Constant opportunity costs
4
EXHIBIT 1
Production Possibilities Frontier (Constant Opportunity Costs)
5
• 2-1b The Bowed-Outward (Concave-Downward) PPF:

Increasing Opportunity Costs
• In Exhibit 2(a), we have identified five combinations of cell
phones and coffee makers that can be produced in an
economy
• We plotted these five combinations in Exhibit 2(b) again
with each combination representing a different point
• The curved line that connects points A-E is the PPF
– Bowed-outward PPF = Increasing opportunity costs
6
EXHIBIT 2
Production Possibilities Frontier (Increasing Opportunity Costs)
7
EXHIBIT 3
A PPF and 3 points
8
• 2-1c Law of Increasing Opportunity Costs

• Law of Increasing Opportunity Costs: As more of a good
is produced, the opportunity costs of producing that good
increase
• In the real world, most PPFs are bowed outward; for most
goods, the opportunity costs increase as more of the good is
produced
• The law of increasing opportunity costs holds for most
goods because people have varying abilities
• Exhibit 4 summarizes the points in this section
9
EXHIBIT 4
A Summary Statement About Increasing Opportunity Costs and a Production
Possibilities Frontier That is Bowed Outward (Concave Downward)
10
• 2-1d Economic Concepts in a Production Possibilities

Frontier Framework
• The PPF framework is useful for illustrating and working
with economic concepts; See Exhibit 5
• Scarcity: The finiteness of resources is graphically
portrayed by the PPF in Exhibit 6
• The PPF separates the production possibilities of an
economy into two regions:
– An attainable region which consists of the points on the PPF
and all points below it
– An unattainable region, consisting of the points above and
beyond the PPF
11
EXHIBIT 5
The PPF Economic Framework
12
EXHIBIT 6
The PPF and Various Economic Concepts
13
• 2-1d Economic Concepts in a Production Possibilities Frontier

Framework (cont)
• Productive Efficient: The condition in which the maximum
output is produced with the given resources and technology
• Productive Inefficient: The condition in which less than the
maximum output is produced with the given resources and
technology. Productive inefficiency implies that more of one
good can be produced without any less of another being
produced
• Technology: The body of skills and knowledge involved in the
use of resources in production. An advance in technology
commonly increases the ability to produce more output with a
fixed amount of resources or the ability to produce the same
output with fewer resources
14
EXHIBIT 7
Economic Growth Within a PPF Framework
15
EXHIBIT 8
Studying and Your PPF
16
Beyond Our PPF (1 of 2)
• In this section, we explain how a country that specializes in
the production of certain goods and then trades them to
countries for other goods can make itself better off; it can
consume at a level beyond its PPF
• 2-2a A Simple Two-Person PPF Model
• Comparative Advantage: The situation in which someone
can produce a good at lower opportunity cost than someone
else can
• See the experience of Brian and Elizabeth in Exhibit 9
17
EXHIBIT 9
Elizabeth’s PPF, Brian’s PPF
18
Beyond Our PPF (2 of 2)
• 2-2b On or Beyond the PPF?
• In Exhibit 10(a), we show the PPF for Elizabeth; through
specialization and trade, Elizabeth’s consumption moved
beyond her PPF
• In Exhibit 10(b), we show the PPF for Brian; when he
specialized and traded his consumption of both goods
increased, and moved beyond his PPF
• A Benevolent and All-Knowing Dictator Vs. the Invisible
Hand:
– Self-interest did for Elizabeth and Brian what a benevolent dictator
would have done
– Adam Smith spoke of the invisible hand that “guided” individuals’
actions toward a positive outcome they did not intend; this is what
happened to Elizabeth and Brian
19
EXHIBIT 10
Consumption for Elizabeth and Brian With and Without
Specialization and Trade
20

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CHAPTER

2-2 Specialization and Trade Can Move Us

• Think of yourself as being alone on an island

• 2-1a The Straight-Line PPF: Constant Opportunity Costs

Production Possibilities Frontier (Constant Opportunity Costs)

• 2-1b The Bowed-Outward (Concave-Downward) PPF:

Production Possibilities Frontier (Increasing Opportunity Costs)

A PPF and 3 points

• 2-1c Law of Increasing Opportunity Costs

• 2-1d Economic Concepts in a Production Possibilities

The PPF Economic Framework

The PPF and Various Economic Concepts

• 2-1d Economic Concepts in a Production Possibilities Frontier

Economic Growth Within a PPF Framework

Studying and Your PPF

Elizabeth’s PPF, Brian’s PPF

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