ECON 2610 Lecture Notes - Lecture 3: Demand Curve, Perfect Competition, Indifference Curve

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Ppf: constant returns to scale, markets are perfectly competitive. Ex: on ppf, 1c = 2f, it will not change. Production of c and f can take 2 options: c and f use k and l in the exact same proportion. Ppf is straight line: c and f use k and l in different proportions. Ppf assumes all inputs are fully employed. If we keep this assumption, but c and f are different, then we have a problem. By producing less c, it will free up capital, but then it just sits there and the owners of capital no longer make money. If price falls low enough, they will use it for other reasons. We underutilize capital: resources are freed up and then not needed. When this happens, the ppf curves: we begin to produce more f, so pk falls as curve falls, give it enough time, and an alternative use for c will be found.

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