Overview
This lecture covers the Production Possibilities Frontier (PPF) model, focusing on its use in illustrating trade-offs, resource allocation, and the concept of efficiency in production with limited resources.
Review of Economic Models
- Economists use models like the circular flow diagram and the PPF to simplify and analyze economic activity.
- Models are simplifications and not perfect representations of reality, but they are useful for understanding core concepts.
The Production Possibilities Frontier (PPF)
- The PPF is a graph showing all combinations of two goods an economy can produce with available resources and technology.
- In this class, the PPF is represented as a straight line for simplicity and ease of calculation (constant slope).
- The PPF assumes only two goods are produced and only one input (labor) is used.
Illustrating Trade-Offs and Opportunity Cost
- The PPF visually demonstrates the trade-off between making more of one good and less of another (opportunity cost).
- Example: With 50,000 labor hours, an economy can allocate labor to produce computers or tomatoes, or some combination of both.
Efficient, Inefficient, and Unfeasible Production
- Points on the PPF line are efficient—resources are fully utilized.
- Points inside the PPF are feasible but inefficient—some resources are unused.
- Points outside the PPF are not feasible—insufficient resources for that combination.
Examples Using the PPF
- All labor allocated to computers yields 500 computers, 0 tomatoes; all to tomatoes yields 5,000 tons of tomatoes, 0 computers.
- Mixed allocations (e.g., 100 computers and 3,000 tomatoes) are possible if they do not exceed total labor hours.
- Producing 300 computers and 3,500 tomatoes is infeasible with current resources.
Key Terms & Definitions
- Model — A simplified representation of reality used to analyze economic concepts.
- Production Possibilities Frontier (PPF) — A graph showing maximum combinations of two goods that can be produced with given resources and technology.
- Efficient Production — Using all available resources; represented by points on the PPF line.
- Inefficient Production — Not all resources are used; points inside the PPF.
- Unfeasible (Not Feasible) — Production combinations that exceed available resources; points outside the PPF.
- Opportunity Cost — The value of the next best alternative forgone when making a choice.
Action Items / Next Steps
- Memorize the definition of the PPF and the meaning of efficient, inefficient, and unfeasible points.
- Prepare for calculations of opportunity cost using the PPF in upcoming lessons.