What is an economic model?

It is a simplified representation of economic activities, systems, or

problems

PRODUCTION POSSIBILITY CURVES

What does the Production Possibilities Frontier (Curve)

represent?a) Opportunity Cost – what we give up to

produce something else

b) Efficiency – are we operating at our maximum efficiency?

c) Underutilization – are we able to produce more?

How do PPC’s affect the individual?

Anyone can use PPC’s in decision-making.

Ex.) You are holding a bake sale and want to bake both brownies & cookies. With the ingredients you have on hand, you can see how

many cookies & brownies you can make in graph form.

How do people use PPC’s?Brownies in dozens

Cookies in dozens

1

2

3

4

1 2 3 4

Notice this is a straight line. Not all ppc’s are a straight line.

How do PPC’s affect industry?

Industries have a graphic representation of what resources they are utilizing and whether or

not they are working at efficiency.

They can also see their opportunity cost of producing

more of one good over another

How does industry use PPC’s?

Fans

Alarm clocks

4

8

12

16

1 2 3 4

Represented in millions

WE MAKE FOUR ASSUMPTIONS WHEN DEALING WITH PPC’s:

1. All resources are fixed.

There are no more resources available for use in production.

5 =

2. All resources are fully employed.

You are using every resource available to you for your production.

= Full Production

3. Technology is fixed.

The technology you are using for production is the best technology you have

available to you.

4. You can only produce two goods.

For the sake of graphing the curve, you can only produce two goods.

http://www.classzone.com/cz/books/econ_cnc/resources/htmls/animated_economics/ec01_anim_learnppc.html

Let’s look at sweaters & bread in industry:

Bread

Sweaters0

10

20

30

40

50

10 20 30 40

Findings: The line drawn represents the limits or “ “ an industry can operate in.FRONTIER

Let’s look at shoes & DVD’s in personal consumption:

DVD’s

Shoes0

5

10

15

20

25

1 2 3 4

Findings: The line drawn represents the limits or “ “ an individual can operate in.FRONTIER

5

Now let’s look at Opportunity Cost in an Industry Table:

POINT BREAD SWEATERS OPPORTUNITY COST

A 0 35

B 10 32

C 20 27

D 30 20

E 40 11

F 50 0

RULE 1:You

move from

point to point.

Start with A.

RULE 2:You are calculating for sweaters

0 sweaters

3 sweaters

5 sweaters

7 sweaters

9 sweaters

11 sweaters

Now let’s look at Opportunity Cost in an Individual Table:

POINT DVD’s Shoes OPPORTUNITY COST

A 20 0

B 18 1

C 15 2

D 11 3

E 6 4

F 0 5

RULE 1:You

move from

point to point.

Start with A.

RULE 2:You are calculating for DVD’s

0 DVD’s

2 DVD’s

3 DVD’s

4 DVD’s

5 DVD’s

6 DVD’s

What else does production possibilities frontier tell us?

At point K –

At point J –

At any point on the curve –

IMPOSSIBLE

UNDERUTILIZATION

EFFICIENCY

K

J

What two factors can change the Production Possibilities

Frontier?

a. New or better technology/labor

b. New resources become available

Earthquake hits California. California companies PPF

New oil reserves found in Alaska

Oil industry PPF

New machine on assembly line cuts the time of making tires by 2 minutes each.

Tire industry PPF

Opportunity Costs are increased by switching from

producing one product to another.