What is an economic model?
It is a simplified representation of economic activities, systems, or
problems
PRODUCTION POSSIBILITY CURVES
What does the Production Possibilities Frontier (Curve)
represent?a) Opportunity Cost – what we give up to
produce something elseb) Efficiency – are we operating at our
maximum efficiency?c) Underutilization – are we able to
produce more?
How do PPC’s affect the individual?
Anyone can use PPC’s in decision-making.
Ex.) You are holding a bake sale and want to bake both brownies & cookies. With the ingredients you have on hand, you can see how
many cookies & brownies you can make in graph form.
How do people use PPC’s?Brownies in dozens
Cookies in dozens
1
2
3
4
1 2 3 4
Notice this is a straight line. Not all ppc’s are a straight line.
How do PPC’s affect industry?Industries have a graphic
representation of what resources they are utilizing and whether or
not they are working at efficiency.They can also see their
opportunity cost of producing more of one good over another
How does industry use PPC’s?
Fans
Alarm clocks
4
8
12
16
1 2 3 4
Represented in millions
WE MAKE FOUR ASSUMPTIONS WHEN DEALING WITH PPC’s:
1. All resources are fixed.
There are no more resources available for use in production.
5 =
2. All resources are fully employed.
You are using every resource available to you for your production.
= Full Production
3. Technology is fixed.
The technology you are using for production is the best technology you have
available to you.
4. You can only produce two goods.
For the sake of graphing the curve, you can only produce two goods.
http://www.classzone.com/cz/books/econ_cnc/resources/htmls/animated_economics/ec01_anim_learnppc.html
Let’s look at sweaters & bread in industry:
Bread
Sweaters0
10
20
30
40 50
10 20 30 40
Findings: The line drawn represents the limits or “ “ an industry can operate in.FRONTIER
Let’s look at shoes & DVD’s in personal consumption:
DVD’s
Shoes0
5
10
15
2025
1 2 3 4
Findings: The line drawn represents the limits or “ “ an individual can operate in.FRONTIER
5
Now let’s look at Opportunity Cost in an Industry Table:
POINT BREAD SWEATERS OPPORTUNITY COST
A 0 35
B 10 32
C 20 27
D 30 20
E 40 11
F 50 0
RULE 1:You
move from
point to point.
Start with A.
RULE 2:You are calculating for sweaters
0 sweaters
3 sweaters
5 sweaters
7 sweaters
9 sweaters11 sweaters
Now let’s look at Opportunity Cost in an Individual Table:
POINT DVD’s Shoes OPPORTUNITY COST
A 20 0
B 18 1
C 15 2
D 11 3
E 6 4
F 0 5
RULE 1:You
move from
point to point.
Start with A.
RULE 2:You are calculating for DVD’s
0 DVD’s
2 DVD’s
3 DVD’s
4 DVD’s
5 DVD’s6 DVD’s
What else does production possibilities frontier tell us?
At point K –
At point J –
At any point on the curve –
IMPOSSIBLE
UNDERUTILIZATION
EFFICIENCY
K
J
What two factors can change the Production Possibilities
Frontier?
a. New or better technology/labor
b. New resources become available
Earthquake hits California. California companies PPF
New oil reserves found in Alaska
Oil industry PPF
New machine on assembly line cuts the time of making tires by 2 minutes each.
Tire industry PPF
Opportunity Costs are increased by switching from
producing one product to another.