lecture 3 Flashcards
what is PPF
- is a curve on a graph that illustrates the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufracture
- a graph that shows various combos of goods/services that the economy can possibly prodice given the available recources (labour , capital, land)
why is the PFF a frontier?
because it consists of all technically efficient combinations of goods and services
such that any increase in production of one requires a decrease in production of the other given the available time, resources and production technology
why is the pff a useful tool?
useful tool to analyse tradeoffs
interpreting the pff
the economy can produce at any point of or inside the PFF
the PPF illustrates trade offs… what does this mean?
if an economy is on the PFF, the only way to produce more of one good is to produce less of the other
points on the production possibilities frontier, PPF
combinations of G and S with all resources efficiently employed - these are all technically efficient combinations
points in the area under/ to the left of the frontier
technically inefficiency: we could produce more goods and or more services with the same resources
points in the area above/ to the right of the frontier
unobtainable combinations: we cannot produce this combination of goods and services with the resources available
what happens as we increase the production of services?
if we are operating with technical efficiency, we have to re allocate resources from goods to services
to maximise, we reallocate those resources most suited to production of services
i.e the opportunity cost pf the additional services is as small as it can be
the opportunity cost of increasing Qservices
opportunity cost is the value of the next best thing forgone in this case:
we have two types of ‘thing’: goods and services
if we are operating technically efficiently ie on the PPF, the opportunity cost of each additional unit of services is the quantity of goods forgone
The PFF gets steeper as Qservices increases
as we increase production of services, we have to reallocate resources from goods to services
that are increasingly less well suited to production of services relative to goods
interpretation of the slope of the ppf
the slope of the curve is the change in whats on the vertical axis with each one unit change in whats on the horizontal axis
what is the formula for presenting case slope?
Qgoods/Gservices
the slope of the ppf is the opportunity cost of producing one more unit of services
what happens as we increase production of services?
if were operating with technical efficiencym we have to re - allocate resources from goods to services,
to maximise, we reallocate those resources most suited to production of services relativd to production of goods
this means we lose the smallest possivle amount of goods for each additional unit of services
ie the opportunity cost of the additional services is as small as it can be
what is the opportunity cost of increasing Qservices
Opportunity cost is the value of the next best thing forgone
in this case we have two types of ‘thing’: goods and services
If we’re operating technically efficiently, i.e. on the PPF,
the opportunity cost of each additional unit of services is the quantity of goods forgone
The PPF gets steeper as Qservices increases
as we increase production of Services, we have to
reallocate resources from Goods to Services
that are increasingly less well suited
to production of Services relative to Goods
So, each additional unit of Services costs more in terms of quantity of Goods foregone
in economics lingo: the ‘marginal’ opportunity cost of Services
increases as production of Services increases
Interpretation of the slope of the PPF
In general, the slope of a curve is the change in what’s on the vertical axis with each one unit change in what’s on the horizontal axis
in the present case, slope = ∆𝑄𝐺𝑜𝑜𝑑𝑠/∆𝑄𝑆𝑒𝑟𝑣𝑖𝑐𝑒𝑠
i.e. how much Goods must we do without to get each additional 1 unit of Services?
due to having to divert resources to Services production
Thus, the slope of the PPF is the opportunity cost of producing
one more unit of Services
Rational behaviour
Note that net benefit could be negative if you choose unwisely
in econ we call this ‘unwise’ behaviour ‘irrational’
Behaving with economic rationality means
making choices that maximise net benefit
if the main objective in a business, for example, is to maximise profit
then the goal of management is to make ‘rational’ decisions
including making choices that improve technical efficiency
similar reasoning holds if the objective in the household is to maximise satisfaction, or well-being
Technical vs. Economic efficiency
We’re assuming technically-efficient production
so we identify a point on the PPF consistent with the data
Is this one technically-efficient output combination special?
yes, if it is the combination of outputs most valued by consumers
if so, it represents ‘economic efficiency’
This is what we take to be a key objective of our economic system
the enduring question is:
what system, or, in practice, what combination of systems, gets us closest to this goal?
What might have changed to affect the PPF in NZ?
Increase (or decrease) in the levels of resources:
Labour, L – through immigration and natural increase
Capital, K – through investment
Natural resources, N – through e.g. boundary changes
Improvement in technology
allows more output from a given quantity of inputs
by substituting lower-cost or higher-productivity inputs
More generally, what might have changed?
Increase in the levels of resources:
Labour, L – through immigration and natural increase
Capital, K – through investment
Natural resources, N – through e.g. boundary changes
Improvement in technology
allows more output from a given quantity of inputs
by substituting lower-cost or higher-productivity inputs
An increase in any of these, all else constant, shifts the PPF outward
The curvature of the PPF can also change due to changes in the variability in the characteristics of resources
