What is an economic model? It is a simplified representation of economic activities, systems, or problems PRODUCTION POSSIBILITY CURVES What does the Production Possibilities Frontier (Curve) represent? a) Opportunity Cost – what we give up to produce something else b) Efficiency – are we operating at our maximum efficiency? c) Underutilization – are we able to produce more? How do PPC’s affect the individual? Anyone can use PPC’s in decision-making. Ex.) You are holding a bake sale and want to bake both brownies & cookies. With the ingredients you have on hand, you can see how many cookies & brownies you can make in graph form. How do people use PPC’s? Brownies in dozens Notice this is a straight line. Not all ppc’s are a straight line. 4 3 2 1 1 2 3 Cookies in dozens 4 How do PPC’s affect industry? Industries have a graphic representation of what resources they are utilizing and whether or not they are working at efficiency. They can also see their opportunity cost of producing more of one good over another How does industry use PPC’s? Fans Represented in millions 16 12 8 4 1 2 3 Alarm clocks 4 WE MAKE FOUR ASSUMPTIONS WHEN DEALING WITH PPC’s: 1. All resources are fixed. There are no more resources available for use in production. 5= 2. All resources are fully employed. = Full Production You are using every resource available to you for your production. 3. Technology is fixed. The technology you are using for production is the best technology you have available to you. 4. You can only produce two goods. For the sake of graphing the curve, you can only produce two goods. http://www.classzone.com/cz/books/econ_ cnc/resources/htmls/animated_econ omics/ec01_anim_learnppc.html Let’s look at sweaters & bread in industry: Bread 50 40 30 20 10 0 10 20 30 40 Sweaters Findings: The line drawn represents the limits or “ FRONTIER “ an industry can operate in. Let’s look at shoes & DVD’s in personal consumption: DVD’s 25 20 15 10 5 0 1 2 3 4 5 Shoes Findings: The line drawn represents the limits or “ FRONTIER “ an individual can operate in. Now let’s look at Opportunity Cost in an Industry Table: RULE 1: You move from point to point. Start with A. POINT BREAD SWEATERS A 0 35 OPPORTUNITY COST 0 sweaters B 10 32 3 sweaters C 20 27 5 sweaters D 30 20 7 sweaters E 40 11 F 50 0 9 sweaters 11 sweaters RULE 2: You are calculating for sweaters Now let’s look at Opportunity Cost in an Individual Table: RULE 1: You move from point to point. Start with A. POINT DVD’s Shoes A 20 0 OPPORTUNITY COST 0 DVD’s B 18 1 2 DVD’s C 15 2 3 DVD’s D 11 3 4 DVD’s E 6 4 F 0 5 5 DVD’s 6 DVD’s RULE 2: You are calculating for DVD’s What else does production possibilities frontier tell us? K J At point K – IMPOSSIBLE At point J – UNDERUTILIZATION At any point on the curve – EFFICIENCY What two factors can change the Production Possibilities Frontier? a. New or better technology/labor b. New resources become available Earthquake hits California. California companies PPF New oil reserves found in Alaska Oil industry PPF New machine on assembly line cuts the time of making tires by 2 minutes each. Tire industry PPF Opportunity Costs are increased by switching from producing one product to another.