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Section 2.2 Production Possibilities Frontier. ( 40 ). Efficiency & Production Possibilities Frontier (PPF) How much can an economy produce with the resources available? What are the economy’s production capabilities?

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Section 2 2 production possibilities frontier

Section 2.2 Production Possibilities Frontier

(40)


Efficiency & Production Possibilities Frontier (PPF)

  • How much can an economy produce with the resources available?

  • What are the economy’s production capabilities?

    • To help consider these questions you need a simple model of the economy beginning with some ________________________.


Simplifying Assumption:

  • The model limits output to two broad classes of products _____________ and ______________.

  • Production during a given period- in this case a _______.

  • The resources available in the economy are fixed in both ___________& _______________ .

  • The ___________________ does not change.

    The point of following the assumptions is to _________the economy’s resources and technology for a period of time to focus on what can possibly be produced during that time


PPF Model

  • Production Possibilities Frontier shows the possible combinations of the two types of goods that can be produced when available resources are employed ___________________ .

  • Efficiency means producing the _______________possible output from available resources.

  • Points during the curve between A & F identify possible ________________of the two goods that can be produced when the economy’s resources are used efficiently.

    • The model can also be used to show inefficient combinations and unattainable combinations.


  • Shape of the PPF

    • Any movement ____________the PPF involves giving up some of one good to get more of the other

    • The law ___________________________states that each additional increment of one good requires the economy to give up successively larger amounts of the other good

  • Shifts of the PPF

    • PPF assumes resources and technology are _____________; over time shape of the PPF can shift outward or inward as resources levels and technology change

    • An ________________shift of the PPF reflects economic growth which is an _________________of the economy’s production possibilities or ability to produce.


  • Changes in Resource Availability

    • If the _________force increases, or an increase of the availability of other _____________or new _____________that employs resources more efficiently = outward shift

    • In contrast a decrease in the availability or quality of resources shifts the PPF _________________.

  • Increases in stock of capital goods

    • The more capital goods an economy produces during one period the more ________it can produce in the next period.

    • Thus, producing more _______________goods this period (building more factories) shifts the economies PPF outward for the next period.

  • Technological Change

    • Another change that could shift the economy’s PPF outward is a ___________________discovery that employs available resources more efficiently (for example, the internet).


Lessons from the PPF

  • The first is ______________.

    • The PPF demonstrates the efficient combinations of output given the economy’s resources and technology

  • The second is ______________.

    • Given the stock of resources and technology an economy can only produce so much

  • The third is _________________.

    • As the economy produces more of one good it must produce less of the other good; the trade-off demonstrates opportunity cost


Lessons from the PPF (cont’d)

  • The ___________out shape of the PPF reflects the law of increasing opportunity cost.

  • An ________________shift of the PPF reflects economic growth.

  • Because society must choose a specific combination of output along the PPF, the PPF emphasizes the need for ________________.

  • Each point along the economy’s production possibilities frontier is an ____________combination of output.


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