Chapter 2: Production Possibilities

Question 1

Production possibilities frontier (PPF)

Answer 1

A graph that shows the combinations of output that the economy can possibly produce given the available resources and technology.

– shows the best an economy can do if it uses all its resources efficiently, given the current technology.

On the line… productively efficient (all resources used given technology)
Outside the line…unattainable…
Inside the line…attainable/feasible but inefficient…

… calculate opportunity costs

Question 2

PFF could be productively efficient but you could be producing a combo of goods society doesnt want… socially inefficient

Answer 2

Efficiency = Productive efficiency (on PPF) + Social efficiency (the right combo of goods).

Question 3

In general for any 2 goods X and Y ( X is on horizontal axis)…

Answer 3

The |slope of PPF| = opportunity cost of X
– as we move down the PPF, the opportunity cost of X good increases
– opportunity costs increase as we produce more of a good…
General rule: Resources are NOT perfectly mobile (Transferable)
— possible that opportunity costs are constant
.. Resources ARE perfectly mobile (transferable)
.. PPF is linear (constant opportunity cost = constant slope)
… give up same amount of 1 good for more of another good at the same rate!

Question 4

Any changes to the amount of available resources, their productivity or changes to the available technology will shift the PPF.

Answer 4

Eg. look at the graphs… slide 24

i.e. labor force increases in both sectors and is equally productive.. shifts the entire PPF out (Right)