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Lecture

Day 3 - Production Possibilities Boundary.odt

2 Pages
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Department
Economics
Course Code
ECON 110
Professor
Ian James Cromb

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Description
Production Possibilities Boundary (PPB) The PPB is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology. The PPB shows several economic concepts: • Scarcity – an economy cannot choose a production alternative outside the curve. • Choice – many available combinations, one must be chosen. • Opportunity Costs – when the economy moves from one alternative to another, it must give up some units of one of the goods to gain more units of the other good. • Efficiency – if the economy produces on the curve, it is producing as much as it can, resources are used efficiently. If an economy is operating within the PPB, either resources are unemployed or resources are inefficiently allocated. • Economic growth – when an economy grows over time, the production possibilities curve shifts outwards, indicating that an economy can now produce more of one or both goods. The diagram shows a typical PPB for an economy, one that is non-linear, concave to the origin. • Implies that the opportunity cost of producing a good rises as more of it is produced (ie. Slope changes) • because some resources are better suited at producing one of the goods than the other. • If we produce very little of a good, it is the resources that are best suited that are used first. • In order to produce more, we have to use less and less well suited resources leading to higher opportunity costs. We can also use the PPB to think about Four Key Economic Problems from your text: • What gets produced and how? • What is consumed and by whom? • Why are resources sometimes left idle? • Is productive capacity growing and how does this come about? The first two are within the realm of microeconomics which focuses on individual decision makers and indiv
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