Economic for Today PP_Ch02ed.pptVIP

* The production possibilities frontier (PPF) A curve that shows the maximum combinations of two outputs that an economy can produce, assuming: resources are fixed during the time period resources are fully employed technology is unchanged. * The PPF * The PPF (cont.) The PPF shows all efficient output combinations where an economy can produce more of one output only by producing less of the other output. All points along the PPF in the previous graph are possible combinations of consumer goods and consumer services, given our assumptions. * The PPF (cont.) Points outside the PPF represent unattainable production possibilities, given current resources and technology. Points inside the PPF represent an inefficient use of current resources. * Shifting the production possibilities frontier The PPF can be used to represent changes in the level of technology and available resources. Economic growth (the ability of an economy to produce greater levels of output) is represented by an outward shift of the production possibilities curve. * The law of increasing costs Opportunity cost increases as production of one output expands at the expense of another. This occurs because factors of production are generally not equally suited to producing one good, compared to another good. That is, opportunity costs rise as resources are shifted away from their best uses. * Shifting the PPF * Shifting the PPF (cont.) Growth could be caused by: An increase in the number of productive resources available to the economy (e.g. more highly skilled labour force, discoveries of minerals). Technological change: the creation, development and application of new products and productive processes. * Present investment and future PPF Choices we make now determine production possibilities in the future. Countries that forgo current consumption today in favour of investment (producing capital equipment) tend to expand their growth rate: the PPF shifts outward. Example: compulsory superannuation *