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Econ 102 - PPF & Basic Questions

Econ 1st 6wks

Gabriel Hernandez

on 12 January 2018

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Transcript of Econ 102 - PPF & Basic Questions

Since resources are limited every society must answer these questions . . .
Production Possibilities Curve & the Three Economic Questions
3 Basic Economic Questions . . .
1. What goods and services should be produced?
2. How should these goods and services be produced?
3. Who consumes these goods and services? For whom are they produced?
1. What goods and services (g/s) should be produced?
goods that satisfy needs and take care of society
goods that satisfy wants (increase wealth and happiness) such as health care, the military, education
often referred to as "guns or butter?"
what is the best way to educate? make class sizes large or hire more people
2. How should these goods and services (g/s) be produced?
some factors are . . .
how should we produce electricity? coal is cheaper than solar power but it pollutes the Earth
should farmers hire more workers or make cheaper food?
3. Who consumes these goods and services?
This is determined by factor payments - the $ people receive for supplying factors of production like land, labor, capital and entrepreneurship.
a person that supplies land or ideas or capital or services that are more valuable will receive more $. Then they can spend more on goods and services.
In a market economy decisions are made by individuals that decide what gets made, how it's made and who consumes g/s. Also called free markets or capitalism.
Societies answer the 3 Economic Questions based on their goals and values.
In a centrally planned economy the central govt alone answers the 3 economic questions.
most economies today are mixed economies
they are market-based economies with a limited role by the govt
Standard of living is the wealth, comfort, goods and services available. This can also include income, jobs and affordable housing.
A nation's economy must grow to improve the standard of living.
Remember . . . economics is the study of how people satisfy their needs and wants by making choices.
Innovation is important in economic growth. Innovation is the creation of better goods, services, technology and ideas.
Do you like your current standard of living?
Our economy affects all of us.
If yes, what do you like about it?
If not, what can you do to change it?
this is a trade-off . . . resources are limited
This production possibilities frontier compares how much guns and butter can be produced at different points on the line.

Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's economic growth.
In macroeconomics, the guns versus butter model is the classic example of the production possibility frontier. It models the relationship between a nation's investment in defense and civilian goods.
In this model, a nation has to choose between two options when spending its finite resources. It can buy guns, butter, or a combination of both.
This relationship represents a country's choices between defense and civilian spending in more complex economies.
if more resources become available, or if technology improves, an economy can increase output an grow
when this happens the entire curve 'shifts to the right'
means using resources in such a way as to maximize the production, or output, of goods and services.
What point on the graph represents
on Graph #2?
What does that mean?
Explain the combination of numbers represented by point X on Graph #2
Explain the combination of numbers at point Y on Graph #1.
Explain why the PPF shifted in Graph #3.
What does point Y represent in Graph #2?
Create this graph in your notebook.
in economic terms cost isn't always money . . . cost is the alternative we give up when we choose one thing over another
this should sound familiar . . . to economist the word cost always means opportunity cost
law of increasing costs
states that when production switches from one item to another, more resources are necessary to increase production . . . and
opportunity cost
For example, if you were a professional athlete would you choose a smaller contract to be on a very talented team, or a bigger contract with a less-talented team?
Remember - production possibilities curve (sometimes called production possibilities frontier or PPF) is used to show the
potential combination of outputs an economy can produce with its resources as you move along the line, or it can compare specific goods and services.
The PPF assumes that all inputs are used efficiently
. The PPF also demonstrates
opportunity cost
, as anytime production increases in one area, it decreases in another due to current limited resources.
production possibilities curve (PPF)

a graph that shows alternative ways to use an economy's resources.
the line we draw that shows the combinations of the production.
used to show the maximum potential combination of outputs an economy can efficiently produce with its resources
to compare how resources are used to produce specific goods/services.
used to also demonstrate under-utilization (inefficiency) or unobtainable goals
Graph #1
Graph #2
Graph #3
Full transcript