Equilibrium for a firm will be the combination of outputs on the PPF that is most profitable. By definition, each point on the curve is productively efficient, but, given the nature of market demand, some points will be more profitable than others. In microeconomics, the PPF shows the options open to an individual, household, or firm in a two-good world. However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed, remaining therefore idle. Conversely, the PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital. Such a shift reflects, for instance, economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can now be produced during the specified period of time without sacrificing the output of either good. PPFs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions.Īn outward shift of the PPC results from growth of the availability of inputs, such as physical capital or labour, or from technological progress in knowledge of how to transform inputs into outputs. By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph), a point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X) indicates impossibility.įigure 1: A production possibilities frontier Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology. One good can only be produced by diverting resources from other goods, and so by producing less of them. This tradeoff is usually considered for an economy, but also applies to each individual, household, and economic organization. A PPF illustrates several economic concepts, such as allocative efficiency, economies of scale, opportunity cost (or marginal rate of transformation), productive efficiency, and scarcity of resources (the fundamental economic problem that all societies face). In microeconomics, a production–possibility frontier ( PPF), production possibility curve ( PPC), or production possibility boundary ( PPB) is a graphical representation showing all the possible options of output for two goods that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time. Blue Collar and White Collar 7ĬAPITAL Financial capital Money invested in a business to make it grow Basic assets used in production Capital goods (Physical capital)-products used to produce the final product machinery, tools, buildings, raw materials, factory, financial securities, company car, … Consumer good = the final product which is sold to consumers 8ĮNTREPRENEURSHIP Starting, operating, and expanding a business Operate businesses to make a profit 9ġ0 Productivity Measures the amount of output produced by a given number of inputs over a period of time.Visualization of all possible options of output for a two-good economy LABOR Work Human Capital A person’s potential for economic productivity Developed by natural talents, education, training, & good habits. LAND Gifts of Nature Property and natural resources Renewable resources Can be replaced Nonrenewable resources Cannot be replaced 6 What should we produce? How should we produce it? For whom should we produce it? 5 Economies produce goods and services to satisfy the people’s wants and needs. WANTS Necessities Things people desire but do not need 3Ĥ Economics The study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources. Social science that studies the choices of producers and consumers as they try to satisfy unlimited wants and needs with limited resources Economies produce goods and services to satisfy the people’s wants and needs. 1Ģ Economics The science of decision making. 1 PRODUCTION 7.01: Describe the basic factors of production such as land, labor, capital, and entrepreneurial skills and their impact on economic activities.
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