Unit 1 Notes - Topic 2 (Production Possibilities Graphs)

• PPC - Curve
• PPF - Frontier
  ·      Show the most that society can produce if it uses ever available resource to the best of its ability
  ·      Six Key Assumptions -
  1.     Full Employment – Never will happen. People are Lazy, no skills, won’t work for $7.25. Retired People. Disabled People. 80% to 90% Factory capacity. 4% to 5% unemployment (Ideal).
  2.     Productive Efficiency
  3.     Fixed Resources – Land, Labor, Capital and Entrepreneurship
  4.     Fixed State of Technology
  5.     No International Trade (Everything is done in America)
  6.     Two Goods are Produced
  ·      3 Movements of the PPG
  1.     Inside of the Curve
  2.     Along the Curve
  3.     Shifts of the Curve – Inside or Outside (Technology or Economics)
  ·      Opportunity Cost – The next best alternative that you must give up in order to get something
  ·      Laws of Increasing Opportunity Cost – As you produce more of one good, the opportunity cost (the forgone production of another good) will increase
  ·      Concave vs. Constant PPG
  ·      Productive Efficiency vs. Allocative Efficiency
  1.     Productive – Products are being produced in the least costly way. Any point on PPG.
  2.     Allocative – The products being produced are the ones that are most desired by society
  
  

- Points A, B and C are attainable (Along the Curve)

- Point D is attainable but inefficent

- Point C is unattainable and caused by technology or economic growth