Tobey Chen ECON 103 2011 Spring
Economic Models: Tradeoffs and Traded
Models: simplified representations of reality
Test one change at a time (assume all other factors held constant)
o The other things equal assumption
o E.g. What if the price of a good changes?
Assume income, preferences, product quality, and other
available products all remain the same.
1. The Production Possibility Frontier
Because resources are scarce, then we must make tradeoffs in production
Time and materials can only be spent making one good or another.
o E.g. baking cookies versus a cake
Assume an economy only produces two goods.
a) Shows the maximum number of coconuts or fish that could be gathered if
all resources devoted to producing one or the other.
b) Shows all possible combinations of coconuts and fish that could be
gathered with all possible combinations of resources used to catch and
1 Tobey Chen ECON 103 2011 Spring
The Production Possibility Frontier
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PPF = all possible combinations of goods produced when all resources are used
Points outside the PPF are not possible because there aren’t enough
resources. --- Point A
Points inside the curve are inefficient because not using all the resources.
More of one good could be produced without making less of the
Interpreting the slope of the PPF
The absolute value of the slope of the PPF is the opportunity cost of the
good represented on the x–axis in terms of the good on the y–axis
Combinations along the PPF are efficient because more of one good can
only be produced if less of the other good is produced. ---tradeoff
The amount of one good that had to be given up to make more of the
other is the opportunity cost of additional production.
*Opportunity cost of production generally increases as quantity produced
2 Tobey Chen ECON 103 2011 Spring
Because if only a small amount is produced, the most suitable resources
can be used not many resources needed, so the opportunity cost is
As more and more is produced, less suitable resources have to be used
more resources needed larger opportunity cost.
The opportunity cost is the positive slope of the PPF. Therefore, the PPF
is always concave
Economies grow when the PPF expands, which can happen when
30 With new
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There are economic growths by:
1) There are more resources
2) There are fewer resources needed per unit of production