ECONOMIC ACTIVITIES:
PRODUCING AND
TRADING
THE PRODUCTION POSSIBILITIES
FRONTIER (PPF)
Assume the following:
Only two goods can be produced in an economy:
televisions and computers
The opportunity cost of one television is one computer
As more of one good is produced, the opportunity cost
between the sets and computer is constant.
Can you tell me what each of these assumptions imply in
terms of the shape of the graph if we plot it?
DEFINITION OF PRODUCTION
POSSIBILITIES FRONTIER
The PPF is a graph representing the possible
combinations of two goods than an economy can
produce in a certain period of time under the conditions
of a given state of technology, no unemployed resources
and efficient production.
So when we have various combinations of two goods
that can be produced, and when we plot them and
connect the lines, that gives us the PPF.
CAN YOU PLOT THIS?
LETS LOOK AT IT GRAPHICALLY
STRAIGHT LINE PPF = CONSTANT
OPPORTUNITY COSTS
THE BOWED OUT PPF: INCREASING
OPPORTUNITY COSTS
Assume the following:
Only two goods can be produced in an economy:
Computers and Television sets
As more of one good is produced, the opportunity cost
between computers and television sets changes.
Again, what can we imply from these two assumptions
regarding the shape of the PPF/graph if we plot it?
CAN YOU PLOT THIS?
LETS LOOK AT IT GRAPHICALLY
Bowed Out PPF = Increasing Opportunity
costs
LAW OF INCREASING OPPORTUNITY
COSTS
Law of Increasing Opportunity costs: As more of a good
is produced, the opportunity costs of producing that good
increases.
The answer is because people have varying capabilities.
For instance, does all of us learn our course material at
the same rate? Some students can be quicker to absorb
material than others.
Let’s look at the example given in the book.
LAW OF INCREASING OPPORTUNITY
COSTS (CONT)
Assume a construction company is hiring workers to build
buildings.
At first, the company will employ the most skilled
workers who are productive, and can quickly (in less time)
can building.
At this point, the first few buildings will be made more
quickly.
What does this imply for opportunity costs of constructing
the buildings?
LAW OF INCREASING OPPORTUNITY
COSTS (CONT)
Now assume that the construction company is becoming
bigger and expanding business.
To make more buildings, they need additional workers.
Assuming that the company had already taken up all the
skilled workers, they are now hiring workers who are less
skilled at making buildings.
As a result, it takes more time to make the same buildings.
What does this imply for opportunity costs of constructing
the buildings?
EXHIBIT 5 A SUMMARY STATEMENT ABOUT INCREASING
OPPORTUNITY COSTS AND A PRODUCTION POSSIBILITIES
FRONTIER THAT IS BOWED OUTWARD (CONCAVE
DOWNWARD)
ECONOMIC CONCEPTS WITHIN THE PPF
FRAMEWORK
ECONOMIC CONCEPTS WITHIN THE PPF
FRAMEWORK
Scarcity, Choice, Opportunity Cost
Productive Efficiency: The condition where the maximum
output is being produced with given resources and
technology.
Productive Inefficiency: The condition where less is being
produced with the given resources and technology.
Productive efficiency implies that more can be produced
without any less of another.
Unemployed Resources
ECONOMIC CONCEPTS WITHIN THE PPF
FRAMEWORK (CONT)
Economic Growth:
Refers to the increased
productive capacity of an
economy.
May be due:
Increase in quantity of
resources
Increase in technology
(the ability to produce
more with the same
quantity of resources)
PRODUCTION, TRADE AND
SPECIALIZATION
Assume we are in an economy that has no money. We
are in a barter system, meaning to get one good, you
need to give up another.
Now assume the following:
Two people: Elizabeth and Brian,
Two goods: Apple and Bread
Right now they are producing both apples and loaves of
bread for their own consumption NO TRADE
PRODUCTION, TRADE AND
SPECIALIZATION
Elizabeth and Brian are producing their own apples and
loaves of bread in the following numbers:
Looking at the table, do you think they should specialize
and trade?
Lets look at opportunity costs!
PRODUCTION, TRADE AND
SPECIALIZATION
In economics, you answer this question by finding who
produces what at the lowest cost. This is called
COMPARITIVE ADVANTAGE.
Based on comparative advantage, Elizabeth produces
bread and Brian produces apples.
Are they both better off?
PRODUCTION, TRADE AND
SPECIALIZATION
