Key Idea: The PPF is a framework used to examine production.
1. Explain what a production possibilities frontier represents.
A production possibilities frontier represents the combination 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
2. Analyze what it means for the PPF to be bowed out from the origin (curved), and what it means for the PPF to be a straight line.
A straight line PPF indicates that the opportunity cost of producing additional units of output is fixed, while a bowed-outward PPF indicates that the opportunity cost rises with production. In order for a nation’s PPF to be bowed outward, resources must be somewhat specialized, so that the law of increasing opportunity costs holds. With specialized resources, additional units of a good can only be produced at increasing opportunity costs. In order for a nation’s PPF to be a straight line, there must be complete interchangeability of resources, with no specialization, so that the law of increasing opportunity costs does not apply ie opportunity costs are constant
3. State the law of increasing opportunity costs and explain why it holds.
The law of increasing opportunity costs says that as more of a good is produced, the opportunity costs of producing that good increase. It holds because people have varying abilities, and aren’t equally adept at producing all goods.
Key Idea: The PPF can be used to demonstrate several economic concepts.
1. Explain how the PPF is used to demonstrate scarcity.
The PPF separates an attainable region (all points on or under the PPF) from an unattainable region (all points above the PPF). Scarcity makes the points above the PPF unattainable.
2. Use the PPF to demonstrate choice and opportunity cost.
Only one point on a PPF can be chosen. When choosing one point over another point, the value of what could have been chosen but wasn’t chosen is the opportunity cost of our choice.
3. Define productive efficiency and use the PPF to demonstrate it.
An economy is productive efficient if it is producing the maximum output with given resources and technology. All of the points on the frontier are points of productive efficiency.
4. Use the PPF to show unemployment.
If there is unemployment, then the economy will be at a point below the PPF.
5. Use PPF curves to show economic growth and list the sources of economic growth.
Economic growth is illustrated by an outward shift of the PPF, and would be caused by more resources or an advance in technology.
Key Idea: Individuals can make themselves better off by specializing in production according to their comparative advantages, and then trading for other goods.
1. Use the concept of comparative advantage to describe who should produce a particular good.
A person who can produce a good at a lower cost than another person has a comparative advantage in the production of that good, and is the person who sho...