Fire drills Production Possibility Frontier Curve AP Microeconomics

Fire drills

Production Possibility Frontier (Curve) AP Microeconomics

Builder Bob says… n Brainstorm a list of the resources required for production of wooden stools.

What is Scarce? n n Factors of production are scarce The factors of production are: ¡ ¡ Land Labor Capital, & Entrepreneurial Ability

Factors of Production: Land n Land (natural resources) ¡ Land is valuable because of its location ¡ Land is valuable because of its contents n n Oil, gold, minerals, trees, etc. Ability to produce food— wheat, corn, cotton Land is finite. Thus, the most desirable land is scarce.

Factors of Production: Labor n Labor (human resources) ¡ ¡ All paid work is labor People who can work are limited How scarce? How much do we pay? Natural unemployment rate 5 n More on this later in the semester

Factors of Production: Capital n Capital (man-made resources) n Plant and equipment used to produce goods and services Capital is limited Capital can be very expensive Capital is Scarce! n n n

Factors of Production: Entrepreneurial Ability n The ability to combine land, labor, and capital in a way to make money. n Limited individuals with ability to set-up and run profitable businesses n 3 out of 5 new businesses in the United States fail in the first two years. ¡ Scarce!

Time to for understanding T or F: Buildings and robot welding machines are examples of capital. T or F: The skills and abilities workers possess are not part of an economy’s factors of production. Which of the following is NOT an example of a factor of production? a. Roads b. Natural Gas c. a Doctor d. a Home Computer used to play Flappy Birds

Production Possibility Frontier n The Production Possibility Frontier (PPF) is a graph that shows all of the combinations of goods and services that can be produced if all of society’s resources are used efficiently.

The PPF Curve/Graph First we assume that the economy has only two products it can produce. Each product is placed on an axis. Burritos Text Example: Burritos or Engines 0 Engines

The PPF Curve/Graph Next, we determine how much of one good could be produced if all the factors of production were dedicated to producing just one of the goods/services. Burritos 110 For our model let’s assume we could produce 110 burritos if we made 0 engines. And we could produce 14 engines if we produced 0 burritos 0 Engines 14

The PPF Curve/Graph Now let’s add a few more points to our graph. 110 If we were to produce 100 burritos, then we would have resources to produce 4 engines. Burritos 100 If we produced only 60 burritos, then we could use those resources to produce 11 engines. 60 And if we produced only 30 burritos, then we could produce 13 engines. 30 0 4 11 Engines 13 14

The PPF Curve/Graph The line developed by joining the production possibilities represents the maximum production for this economy given its current factors of production and technology. 110 Burritos 100 60 30 0 4 11 Engines 13 14

Production Possibility Frontier 110 The Production Possibility frontier/ curve has a negative slope, which indicates a trade-off between producing one good another. Burritos 100 60 30 0 4 11 Engines 13 14

What the PPF tells us n Scarcity n Trade-offs K 110 Burritos 100 B ¡ At a Opportunity Cost of 40 Burritos C 60 30 7 Engines Gained 0 4 11 Engines 13 14 Opportunity Costs Let’s say we want to produce more engines (moving to point “C” and that we are currently at We gain point “B”. a total of 7 new engines produced. But they have a cost, an opportunity cost, of 40 Burritos. Point “K” is beyond the production possibilities of this economy given its current resources and technology.

A Key Point: Opportunity Costs 110 Burritos 100 Moving from point “B” to “C” costs approximately 6 burritos for each new engine. n Constant B n Increasing ¡ At a Opportunity Cost of 40 Burritos C 60 At a Opportunity Cost of 30 Burritos 7 Engines Gained 0 4 11 Engines Moving from point “C” to “D” costs 15 burritos for each new engine. D 30 13 Law of Increasing Opportunity Costs 2 Engines Gained 14

What the PPF tells us n 110 Burritos 100 n At point “R” the economy is not fully utilizing all its resources or factors of production. At point “R” it is assumed that the economy is experiencing unemployment. 60 R 30 0 Efficiency: productive, allocative Economic Growth 4 11 Engines 13 14

Production Possibility Frontier Shift Out Shift In 110 Change Along the PPF Burritos 100 Change Towards the PPF 60 Change Away From the PPF 30 0 4 11 Engines 13 14

Improved engines increase the mileage of automobiles. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

Large share of the population stays home because of a flu epidemic. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

A recession increases unemployment. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

The government says that drivers with odd numbered license plates may be driven only on odd numbered days. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

A California earthquake damages factories. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

Government mandates a shorter work week for everyone. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

A new invention reduces the resources required to produce cars. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

The government raises tax for gas and lowers the price for train fare. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

Aging of population leads to an increase of the economy's resources for health care. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

A change in immigration law allows more skilled entrants to enter the country. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

The use of a certain technology is banned for political reasons. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

Research shows that consumption of Oreo cookies is bad for your health. People now buy Nilla wafers. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF

An increase in government spending reduces unemployment. n n n Shift out Shift in Change along the PPF Change towards the PPF Change away from the PPF