Overview
This lecture introduces the Production Possibilities Frontier (PPF), explaining its role in illustrating scarcity, trade-offs, opportunity cost, and economic growth.
The Production Possibilities Frontier (PPF)
- The PPF (also called PPC) shows the maximum combinations of two goods/services that can be produced with available resources.
- It demonstrates core economic concepts: scarcity (limited resources), trade-offs, and opportunity costs.
- The PPF is typically shown with two goods for simplicity, but applies to many.
- Points on the PPF represent efficient use of resources.
- Points inside the PPF indicate under-utilization of resources.
- Points outside the PPF are unattainable given current resources and technology.
Trade-offs and Opportunity Cost
- As you produce more of one good, less of the other can be produced due to limited resources.
- The PPF curve is concave (bowed outward) because of increasing opportunity costs.
- Increasing production of one good means giving up more and more of the other (resources less suited to the new good get used).
- Opportunity cost is calculated as the amount of one good given up to produce more of the other.
- Example: Producing 10 more units of coal costs 10 units of iron ore (opportunity cost = 1 iron ore per coal unit).
- Opportunity costs rise as production shifts further towards one good.
Economic Growth and Technology
- Increases in resources (land, labor, capital) shift the PPF outward, showing economic growth.
- Technological improvements for one good pivot the PPF outward for that good only.
- Technological improvements for both goods shift the entire PPF outward.
Key Terms & Definitions
- PPF (Production Possibilities Frontier) — Graph showing maximum possible output combinations of two goods given resources and technology.
- Scarcity — The condition of having limited resources to meet unlimited wants.
- Trade-off — Sacrificing one good or service to produce more of another.
- Opportunity cost — The value of the next best alternative forgone when making a choice.
- Economic growth — Increase in the ability to produce goods/services, shown by an outward PPF shift.
- Efficiency — Using all resources in the best way possible, represented by points on the PPF.
Action Items / Next Steps
- Review the PPF diagram and understand how to read points on, inside, and outside the curve.
- Practice calculating and interpreting opportunity costs with different examples.
- Prepare to apply PPF concepts to real-world economic issues in upcoming classes.