Overview
This lecture covered the Production Possibility Frontier (PPF) and economic systems, focusing on how different economies answer the basic economic questions and how PPF shifts under various scenarios.
Production Possibility Frontier (PPF)
- The PPF shows combinations of two goods (e.g., oranges and lima beans) an economy can efficiently produce.
- Points on the PPF line are efficient; points inside the curve indicate inefficiency (e.g., during recession with unused labor).
- Permanent resource loss shifts the PPF inward; temporary inefficiency moves production inside the curve.
- A disaster affecting only one good (e.g., frost killing oranges) lowers max possible output of that good only.
- Technological improvements or more resources shift the PPF outward, indicating economic growth.
- Increased demand (e.g., preference for orange juice) does not shift the PPF, but leads to movement along the curve, reallocating resources.
Opportunity Cost & PPF Examples
- Moving from producing more of one good to another on the PPF illustrates opportunity cost: gain in one good requires giving up some of the other.
- Opportunity cost can be observed by comparing production points and noting lost output.
Basic Economic Questions
- All societies must answer: What to produce? How to produce? For whom to produce?
- These questions arise due to resource scarcity.
Economic Systems
- Traditional Economy: Answers are based on custom and tradition; stability is high, but innovation is low.
- Command Economy: The state owns and controls all resources; production, allocation, and distribution are centrally planned.
- Supposed benefits: equitable distribution, low unemployment, focus on socially useful products.
- Problems: inefficiency, lack of innovation, planning mistakes, lack of freedoms.
- Modern examples include North Korea and (to a lesser degree) China and Cuba.
Key Terms & Definitions
- Production Possibility Frontier (PPF) — Graph showing maximum possible output combinations of two goods given resources and technology.
- Efficiency — Using the least resources for the most output.
- Opportunity Cost — Value of the next best alternative forgone in a choice.
- Traditional Economy — System where customs and tradition determine economic decisions.
- Command Economy — System where the government decides all economic activity.
- Scarcity — Limited resources to meet unlimited wants.
Action Items / Next Steps
- Study assigned questions and the current chapter for the test.
- Watch the third lesson video for section 1.3 at home.
- Complete the worksheet given during class.