PPF

• • Represents all combinations of two alternative products that can be produced by an economy given the available resources and the level of technology, given certain assumptions
• • Assumptions. Resources, technology is fixed. Economy produces only 2 goods.
• • There is NO best position on the curve, any position on the curve is most efficient use of those resources
• Why does the PPF have a negative slope?

  • As more of the other good is produced, less of the first product can be produced as there are relatively scarce resources.
  • Due to opportunity cost and choice, an economy must forgo something to gain another
• Demonstrates:

  • Scarcity
  • You can not produce beyond the curve
  • Choice
  • The choices facing all countries in producing goods which use limited factors of production
  • Trade-Offs

  Moving along the PPF to produce more of one good requires sacrificing some production of the other.

  • Opportunity Cost
  • The specific numbers/cost of things given up
  • When moving from different points, what is produced less is the opportunity cost
• Constant Opportunity Cost

  • Straight Curve

  The opportunity cost is constant

  Production can easily be diverted with no change in opportunity cost
• Increasing Opportunity Cost

  • Bowed Curve

  When you divert your production away to something else, you become less efficient, subsequently their is increasing opportunity cost
• • According to the model we can't produce beyond our PPC, but we can consume beyond our PPC
• • An economy can expand its PPC if it fines a way of expanding its resource or improves the productivity of those resources it already has.
• Assumptions:

  1. The state of technology is constant/fixed, but can be transferred from one use to another
  2. The quantity of resources available remains unchanged
  3. The economy only produces 2 goods.
  4. All resources are fully & efficiently employed/utilised/allocated. presumed 0% unemployment. Use resources for best use, maximising efficiency and resources
• Elements to include when drawing:

  • Title (PPF of guns and butter)
  • Label the axis
  • Draw the curve
  • Labels points
• 1. Desirable but unattainable: points outside the PPC, don't have the resources to produce that quantity.
• 1. Efficient & Obtainable: points on the curve, represent “productive efficiency” – no wastage or underemployment of resources to produce the maximum output possible (the choices available)
• 1. Inefficient & attainable: points inside the PPC, is productively inefficient – resource wastage or underemployment