The Production Possibilities Curve and Efficiency · The Production Possibilities Curve and...
Transcript of The Production Possibilities Curve and Efficiency · The Production Possibilities Curve and...
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The Production Possibilities Curve and Efficiency
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Productive Efficiency-• Products are being produced in the
least costly way. • This is any point ON the Production
Possibilities CurveAllocative Efficiency-
• The products being produced are the ones most desired by society.
• This optimal point on the PPC depends on the desires of society.
Two Types of Efficiency
2Copyright ACDC Leadership 2015
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Productive and Allocative EfficiencyB
ikes
Computers
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12
10
8
6
4
2
00 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?Which are allocatively efficient?
G
3
Productively Efficient combinations are A through D
Allocative Efficient combinations depend on
the wants of society (What if this represents a
country with no electricity?)
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Why two types of efficiency?
Size 20 running shoes
Size 10 running shoes
A
Is combination “A” efficient?Yes and No. It is productively efficient but it is not the
combination society wants
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2008 Audit Exam
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2008 Audit Exam
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Shifting the Production Possibilities Curve
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4 Key Assumptions Revisited• Only two goods can be produced• Full employment of resources• Fixed Resources (4 Factors)• Fixed Technology
What if there is a change?3 Shifters of the PPC
1. Change in resource quantity or quality 2. Change in Technology3. Change in Trade 9
Production Possibilities
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Com
pute
rs
Pizzas
What happens if there is an increase
in population?
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Production Possibilities
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Com
pute
rs
Pizzas
What happens if there is an increase
in population?
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Production Possibilities
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Com
pute
rs
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
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Com
pute
rs
Pizzas
What if there is a technology improvement
in pizza ovens
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Production Possibilities
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Panama – Favors Consumer Goods
Mexico – Favors Capital Goods
Consumer goods
Cap
ital G
oods
Current PPC
Future PPC
Consumer goods
Cap
ital G
oods
Future PPC
Current PPC
Capital Goods and Future Growth
MexicoPanama14
Countries that produce more capital goods will have more growth in the future.
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PPC PracticeDraw a PPC showing changes for each of the
following:Pizza and Computers (3)
1. New computer making technology2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)4. Destruction of power plants leads to severe
electricity shortage 5. Faster computer hardware6. Many workers unemployed7. Significant increases in education
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New computer making technology
Com
pute
rs
Pizzas
Question #1
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A shift only for computers
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Decrease in the demand for pizzaC
ompu
ters
Pizzas
Question #2
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The curve doesn’t shift!A change in demand
doesn’t shift the curve
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Mad cow disease kills 85% of cowsC
ompu
ters
Pizzas
Question #3
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A shift inward only for Pizza
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Destruction of power plantsC
apita
l Goo
ds (G
uns)
Consumer Goods (Butter)
Question #4
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Decrease in resources decrease production possibilities for both
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Faster computer hardwareC
apita
l Goo
ds (G
uns)
Consumer Goods (Butter)
Question #5
20
Quality of a resource improves shifting the
curve outward
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Many workers unemployedC
apita
l Goo
ds (G
uns)
Consumer Goods (Butter)
Question #6
21
The curve doesn’t shift!Unemployment is just a point inside the curve
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Significant increases in educationC
apita
l Goo
ds (G
uns)
Consumer Goods (Butter)
Question #7
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The quality of labor is improved. Curve shifts
outward.