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Economics (157)
ECON 0110 (84)
Lecture

Section 4 Notes.doc

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Department
Economics
Course
ECON 0110
Professor
K E N K E L
Semester
Spring

Description
SECTION 4: PRODUCTION POSSIBILITY FRONTIER A graph that shows all combinations of TWO goods or services that can be produced if all of society’s resources are used efficiently. The PPF illustrates the trade offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity of the other. ASSUMPTIONS ABOUT THE PPF 1. Amount of resources is fixed THE FACTORS OF PRODUCTION ARE: land or raw materials labor capital (plant & equipment) entrepreneurship 2. State of technology is fixed 3. We have full employment of all resources No unemployment of labor No excess capacity in factories 4. We use all resources efficiently PPF shows maximum output possibilities that are available Points outside the PPF are not possible given current resources and technology Points inside the PPF are inefficient By better utilization of resources, we could achieve points on the PPF CONCEPT OF EFFICIENCY Points on the frontier are efficient WHY IS A COUNTRY INSIDE ITS PPF? Unemployment of labor Underemployment of labor Under use of plant & equipment Inefficient allocation of resources PPF ILLUSTRATES Full employment
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