CHAPTER 2
●The Production
Possibilities Frontier
●Specialization and
Trade Can Move Us
Beyond our PPF
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What is the production
possibilities curve?
A curve that shows the maximum combinations
of two outputs an economy can produce in a
given period of time with its available resources
and technology
What are the three
basic assumptions that
underlie the production
possibilities curve?
1. All resources are fully employed.
2. The resource base is not allowed to vary
during the time period.
3. Technology remains constant.
What is technology?
The body of knowledge applied to how goods are
produced
Example
Output Production possibilities
(billions of units per A B C D
year)
Military goods 160 140 80 0
Consumer goods 0 40 80 100
EXHIBIT 2 The Production Possibilities Curve
for Military Goods and Consumer Goods
A Unattainable points
160 Unattainable
B Z
(billions of units per year)
140 point
Output of military goods
120
All points on
100
U curve are
80 C efficient
Inefficient
60 point
40 PPC
Attainable points
20 D
0 20 40 60 80 100 120
Output of consumer goods
(billions of units per year)
2-1 The Production Possibilities
Frontier(3 of 6)
• 2-1b The Bowed-Outward (Concave-Downward)
PPF: Increasing Opportunity Costs
• In Exhibit 2(a), we have identified five
combinations of cell phones and coffee makers
that can be produced in an economy
• We plotted these five combinations in Exhibit
2(b) again with each combination representing
a different point
• The curved line that connects points A-E is the
PPF
• Bowed-outward PPF = Increasing opportunity
costs
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What is an efficient point?
Any point along the production possibilities
curve because each point represents a
maximum output possibility
What is an
inefficient point?
Any point inside the production possibilities
curve due to an economy operating without all
its resources fully employed
What is an attainable
point?
• Any point inside or along the production
possibilities curve because it can be achieved
with the economy’s present production
capabilities
What is an
unattainable point?
• Any point outside the production possibilities
curve because it is beyond the economy’s
present production capabilities, even when it is
operating with all its resources fully employed
What conclusion can
we make regarding
scarcity and the production
possibilities curve?
Scarcity limits an economy to points on or
below its production possibilities curve.
What conclusion can
we make regarding
the production
possibilities curve?
The production possibilities curve consists of all
efficient output combinations at which an
economy can produce more of one good only by
producing less of the other good.
What is the law of
increasing opportunity
costs?
• The principle that the opportunity cost
increases as production of one output expands
EXHIBIT 3 Production Possibilities Schedule
for Tanks and Sailboats per Year
Output Production possibilities
(thousands per year) A B C D
Tanks 80 70 50 0
Sailboats 0 20 40 60
EXHIBIT 3 The Law of Increasing Opportunity
Costs
A
80 B
70
(thousands per year)
60
C
Tanks
50
40
30
PPC
20
10 D
0 10 20 30 40 50 60
Sailboats
(thousands of units per year)
What conclusion can we make
regarding the
law of increasing opportunity
costs?
• Because resources are not equally well-suited
to producing all products, it’s common to
experience increasing opportunity costs and a
bowed-out production possibilities curve.
2-1 The Production Possibilities
Frontier(6 of 6)
• 2-1d Economic Concepts in a Production Possibilities
Frontier Framework (cont)
• Productive Efficient: The condition in which the
maximum output is produced with the given resources
and technology
• Productive Inefficient: The condition in which less
than the maximum output is produced with the given
resources and technology. Productive inefficiency
implies that more of one good can be produced without
any less of another being produced
• Technology: The body of skills and knowledge involved
in the use of resources in production. An advance in
technology commonly increases the ability to produce
more output with a fixed amount of resources or the
ability to produce the same output with fewer resources18
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What is economic
growth?
The ability of an economy to produce greater
levels of output, represented by an outward shift
of its production possibilities curve
What are ways to achieve
economic growth?
• An increase in resources
• An advance in technology
CAUSATION CHAIN
Increase in
resources or Economic
technological growth
advances
EXHIBIT 7
Economic Growth Within a PPF Framework
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EXHIBIT 8
Studying and Your PPF
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2-2 Specialization and Trade Can Move
Us Beyond Our PPF (1 of 2)
• In this section, we explain how a country that
specializes in the production of certain goods and
then trades them to countries for other goods
can make itself better off; it can consume at a
level beyond its PPF
• 2-2a A Simple Two-Person PPF Model
• Comparative Advantage: The situation in
which someone can produce a good at lower
opportunity cost than someone else can
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EXHIBIT 3 Effect of Specialization
without Trade on World Output
Grain production Steel production
(tons per day) (tons per day)
Before specialization
United States (at point B) 60 20
Japan (at point E) 30 10
Total world output 90 30
After specialization
United States (at point A) 100 0
Japan (at point F) 0 40
Total world output 100 40