Econ 101 - Chap. 2.2: Production Possibilities Frontier and Social Choices

Production Possibilities Frontier (PPF)

• simplest macroeconomic model

• shows the productivity efficient combo of two products that an economy can produce given the resources it has available

• Slope shows opportunity cost → how much units something needs to give up to increase another concept by one extra unit

• When a point is inside the slope, economy does not use all the resources (low capacity utilization

• If it’s outside the slope, it is not attainable with existing resources and tech

Law of Diminishing Returns

• Adding extra resources increases output of a good, but it increases it at a diminishing rate

• marginal benefit of an extra unit will decline as additional resources to producing a good or service are added

• Law of diminishing marginal utility is a specific case of this

• Essentially prioritizing the quantity which overall will decrease the quality, which deprives other sections of their production

Budget Constraint vs PPF

Budget constraint: a straight line, meaning its slope is the same at any quantities of the goods

• Focuses on fixed prices of two goods

PPF: has a curved line, doesn’t have specific numbers, has a curved line because I’d law of diminishing returns

• Focuses on resources

Similarities between Budget Constraint and PPF

• shows constraints under which individual consumers and society operate

• Shows trade off in choose more of one good at the cost of less of the other

• Slope shows how many units of good 1 needs to be given up to obtain one extra unit of good 2

Productive Efficiency vs Allocative Efficiency

• Productive: produces maximum amounts of two goods that can be produced in a certain combo of quantities

• Allocative: mix of goods produced that represents the mix that society most desires

PPF and Comparative Advantage

• countries have different opportunity costs of producing goods because of resources

• A country has a comparative advantage when they produce a good at a lower opportunity cost