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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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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.