Efficiency and Production Possibilities Frontier

· PPF model

„ Shows possible combinations of 2 types of goods that can be produced when available resources are used fully and efficiently

„ Figure 2.1

· Inefficient and unattainable production

„ Point I and U on the curve

· Shape of the PPF

„ Any movement along PPF involves giving up something

The resources in an economy are not all perfectly adaptable. Law of increasing opportunity cost – each additional increment of one good requires the economy to give up larger increments of other good. The PPF has a bowed-out shape due to the law of increasing opportunity cost

Shifts in the PPF

· Economic Growth – an expansion in the economies ability to produce

· Changes in resource availability

„ Increase (more labor) – PPF shifts outward

„ Decrease (less resources) – PPF shifts inward

· Increases in stock of capital goods

· Technological change