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Chapter 2

Econ 1B03 - Chapter 2 PPF.docx

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Hannah Holmes

Richard Damra Monday, January 14, 2013 Econ 1B03 – Chapter 2 – Production Possibilities Production possibilities Frontier  PPF: A graph the shows the combinations of output than an economy can possibly produce given the available resources and the production technology  It shows the best an economy can do if it uses all its resources efficiently, given the current technology. 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 computer and cars Macland can produce if it uses all its resources, given the current technology  PPF for Macland  Richard Damra Monday, January 14, 2013  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.  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.  Every point on the PPF is productively efficient o But you could be on the PPF but producing a combination of goods that society doesn’t want. i.e wrong combination o You’d be at a point that’s socially inefficient. o So, overall efficiency includes productive (on the PPF) and social (the right combo for society) efficiency  Every choice on the PPF involves a trade off o E.g we have to give up some computers to get more cars and vice versa  The PPF illustrates opportunity costs o How much we have to give up of one good to get more of another   To move from 0 cars to 600 cars: o To get 600 cars, give up 800 computers o To get 1 car, give up 800/600 = 1.33
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