Production Possibilities Frontier What is the Full Potential

Production Possibilities Frontier What is the “Full Potential” of a Country?

Branches of Economics • Microeconomics looks at individual parts of economy: – How households & firms make decisions and interact in specific markets • Macroeconomics looks at the entire economy: – Economy-wide phenomena including: inflation, unemployment, interest rates & GDP (economic growth)

Define Efficiency Achieving the maximum benefit from a given amount of scarce resources Scarce Resources Produce New Products

Production Possibilities Frontier • PPF line = the maximum possible output of a country to produce goods/services. – Assumes a country produces only 2 goods/services – All resources (land, labor, capital) are used efficiently • PPF slope = trade-off (the opportunity cost) of producing one good versus another good. PPF Graph Trade-off: To gain 1 Fish => you give up 2 Coconuts (4, 2)

PPF Graph & Efficiency Qty PPF Graph Food (0, 100) . . . Any point above line is Unobtainable in Short Run with existing technology & resources C B (50, 50) Any point on line is Efficient production of goods A (100, 0) Any point below line is Inefficient i. e. Below full potential, wasting resources i. e. @ full potential output @ full employment (4. 0% for USA) Qty Shelter No underemployment

Long Run Goal for Society Cars Country A To shift PPF to the right (gain more from output from the same resources) To shift right: Computers • • • Invest in technology Invest in education Become more efficient Discover new resources Increase in population

PPF Summary • PPF Line represents all efficient production points – It is a countries “full potential” output with existing resources – The slope of PPF is the “trade off” between goods • Points below are inefficient – Country is wasting scarce resources Trade off = 1: 1 Give up 1 Food for 1 Computer • Points above are unobtainable in short run – With current level of technology & resources • Long Run goal is to shift the line outward (to right) – By becoming more efficient through increases in technology, education, size of labor force, business investment, etc….

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