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Topic 2: The Production Possibility Model

by: Ashley Notetaker

Topic 2: The Production Possibility Model 165

Marketplace > Missouri State University > Economcs > 165 > Topic 2 The Production Possibility Model
Ashley Notetaker
Principles of Microeconomics
Reed Olsen

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About this Document

Microeconomics is all about the graphs. Here are the fundamentals you will need to know about the Production Possibility Model. Enjoy!
Principles of Microeconomics
Reed Olsen
75 ?




Popular in Principles of Microeconomics

Popular in Economcs

This 7 page Bundle was uploaded by Ashley Notetaker on Tuesday September 15, 2015. The Bundle belongs to 165 at Missouri State University taught by Reed Olsen in Summer 2015. Since its upload, it has received 22 views. For similar materials see Principles of Microeconomics in Economcs at Missouri State University.


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Date Created: 09/15/15
Togic 2 Notes Production Possibility Model Shows scarcity of resources and scarcity of production E E III 1oo quotHi l I I I I I I I I I I I I I I I I I I I 1239 Guno Graph 1 E E III IIIIIII Production Possibility Frontier PPF IUD Guno Graph 2 Scarcity only occurs if the Production Possibility Frontier is a downward curve Points like A or in the frontier if Technological inefficiency or unemployment Points like B or on the curve if Technologically efficient and full employment only way to produce more of one product is to produce less of the other product Points like C Unattainable with the current level of resources and technology Since Point B is possible if point A then 1 Economy s production is inefficient even though all resources are being used resources are being wasted 2 Economy is not using all resources 3 Both 1 amp 2 simultaneously Opportunity Cost Graph 2 16 13 Must give up 1 lb of butter for 1 more gun and viceversa Bu er l PPF SD Guns Graph 5 Opportunity Cost Graph 5 16 23 One more gun costs 2 lbs of Butter One more lb of Butter cost 12 a gun Production Possibility Frontier can only occur if 1 Change in level of resources 2 Change in level of technology Change in Resources Increase in resources shifts PPF curve to the right Decrease in resources shifts PPF curve to the left N Elufter I I PPR PPRPPFS Graph 6 Guns Change in Technology If change of technology for both goods 1 Increase in technology shifts PPF curve to the right 2 Decrease in technology shifts PPF curve to the left However often new technology is specific to a certain good Ex f increase in butter technology shifts PPF curve to the right of the butter intercept Decrease in butter technology shifts PPF curve to the left of the butter intercept Elul39ter PPF2 PPR Guns Graph 1quot What is a Law Law of Increase of Opportunity costs Eventually as the production of good increases the opportunity cost of a fixed increase in production must increase Elul39ter lEIIII IIZIIZI Guns Graph 1 Law of Diminishing Returns Eventually as the production of the good increases returns The increased production from a fixed increase in resources must decrease Assumptions of PPF 1 Scarcity 2 Production of only 2 goods 3 Resources are homogeneous Three Types of Labor Joanne Machinist Better at gun production worse at butter production heterogenous Joe Farmer Better at butter production worse at gun production heterogeneous Jack Handyman Equally goodbad at gun and butter production homogeneous When changing from butter production to gun production you would change resources in this order 1 Switch Joanne Machinist to gun production 2 advantages more guns not giving up much butter This will initially lower opportunity cost Elul39ter mu lac 1IZIIZI Guns Graph 8 2 Switch Jack Handyman to gun production 3 Switch Joe Farmer to gun production 2 disadvantages fewer guns and give up more butter This will increase opportunity cost Elul39ter 1nnFC 1IZIIZI Guns Graph 9 Consumption Produced and then consumed durable Takes awhile to be consumed Ex car nondurable Consumed immediately Ex food Investment Production of new capital IR Replacement level of 1 f is greater than IR then K increases in future PPF increases in the future 2 f is less than IR then K decreases in future PPF decreases in the future 3 If I IR then K stays the same in the future PPF stays same in future Conaumption Gouda In a In Investment Gouda Graph 12 Viscous Circle of Poverty Cs Subsistence level of C If C is less than Cs the faminestarvation occurs If C is greater than C then there is enough food to feed the population Cnnaumptinn 300513 Consumption Gouda Ie I n Investment Geede R lnveetment Geede Developed Country Developing Country Graph 15 Only 2 ways to get out of poverty 1 Internal Solution Increase investment and let the less productive members of society starve 2 External Solution Foreign aid or war Model Shows Scarcity Unemployment amp full employment Technologica efficiency amp inefficiency Opportunity Cost Law of Diminishing Returns Law of Increasing Opportunity Costs Choices we make today affect future PPFs


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