Before We Move On

Specialization
Absolute advantage
Relative advantage
Unfair advantage
Capital
Quality product
Quality control
Finished good
Division of labor
Means of production

The Production Possibilities Frontier (PPF) measures the quantity of two
goods that an economy or business is capable of producing with its current
available resources and technology
2-20
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
2-21
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
To gain 1 unit of Guns
Had to give up 1 unit of butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was one unit of
butter
2-22
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
To gain 1 unit of Guns
Had to give up 2 units of butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was two units of
butter
2-23
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
To gain 1 unit of Guns
Had to give up 3 units of butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was three units of
butter
2-24
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
To gain 1 unit of Guns
Had to give up 4 units of butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was four units of
butter
2-25
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
Point Units of Butter Units of Guns
A 15 0
B 14 1
C 12 2
D 9 3
E 5 4
F 0 5
Hypothetical Production Schedule
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities
Curve
To gain 1 unit of Guns
Had to give up 5 units of butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing
In this particular instance, the opportunity cost
of gaining one unit of guns was five units of
butter
When you are on the line (PPF), to get more of one thing you have to give
up some of the other thing.
When you are at a point that is inside the line (PPF) it is possible to get
more of both.
If you were at point G, it would be possible to move to point D or any
other point on the line (PPF) and get more butter and more guns.
2-26
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
1
0
2 3 4 5 6
G
Points Inside and Outside the Production Possibilities Curve
Frontier
Every point on the curve represents output at Full Employment &
Productive Efficiency
Every point inside the curve represents output at less than Full employment
Only one point on the curve represents the point of Allocative Efficiency
2-27
Units of guns
16
14
12
10
8
6
4
2
A
B
C
D
E
F
W
X
Y
1 2 3 4 5 6
0
Z
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Where we usually are
A Recession
A Depression
Point W represents
output at more than full
employment and is
currently unattainable
Production Possibilities
Curves
A move from PPC to PPC to PPC represents economic growth
1 3 2
2-33
Units of guns
15
10
5
0
PPC
1
PPC
2
PPC
3
5 10 15
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Production Possibilities Curves Over
Time
Country A Country B
Country A represents slower
economic growth than Country B
Country A capital goods is 3.8 units
Country B represents much faster
economic growth than Country A
Country B capital goods is 7.0 units
2-34
Units of consumer goods
25
20
15
10
5
0
PPC
2001
PPC
1991
A.
Units of consumer goods
25
20
15
10
5
0
PPC
2001
PPC
1991
B
B.
5 10 15 5 10 15
A
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.