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Ch 2 PPF.pdf

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McMaster University
Hannah Holmes

Chapter 2 Production Possibilities The Production Possibilities Frontier • The production possibilities frontier, PPF ,is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. • It shows the best an economy can do if it uses all its resources efficiently, given the current technology. • NOTE: the PPF is often called a production possibilities boundary, PPB. Example: Macland • Consider the economy of Macland. It produces only 2 goods: computers and cars. • Macland’s technology is given (it is what it is). • Its resources are fixed. • The following table shows combinations of computers and cars Macland can produce if it uses all its resources, given the current technology: COMPUTERS and CARS A 3000 0 B 2200 600 C 2000 700 D 0 1000 Note that this is only a partial table. Let’s graph these combinations: PPF for Macland Computers A 3000 B 2200 2000 C D 600 700 1000 Cars PPF for Macland Computers A 3000 B 2200 2000 C Production Possibilities Frontier, PPF D 600 700 1000 Cars Computers A H Unattainable 3000 B 2200 2000 C Production Possibilities 1200 K Frontier, PPF Attainable but inefficient D 400 600 700 1000 Cars • Points A, B, C and D on the diagram are productively efficient – to produce these combos all resources are used, given the technology. • Point H lies outside the PPF – it is unattainable. There are not enough resources to produce that combo of goods, or the technology is not good enough or possibly both. • Point K lies inside the PPF. Macland can produce that combo, but it can produce more of one or the other or both, given the technology and available resources. • Point K is feasible, but not efficient. • Every point on the PPF is productively efficient. • However, you could be on the PPF but producing a combination of goods that society doesn’t want – i.e., the wrong combination. • You would be producing at a point that is socially inefficient. • Efficiency, then, includes productive efficiency (on the PPF) and social efficiency (producing the combo of goods that society wants). • Every choice along the PPF involves a trade-off. • We have to give up some computers to get more cars and vice versa. • The PPF illustrates opportunity costs – how much we have to give up of one good to get more of the other. PPF for Macland Computers A 3000 800 B 200 2200 C 2000 Production Possibilities Frontier, PPF 2000 D
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