Production Possibilities Graph- January 5, 2017

Production Possibilities Graph

• Production possibilities graph (ppg): shows alternative ways to use an economy's resources.
  -Line on the PPGis known as the frontier or curve
  -When producing at the frontier, efficiency occurs
  -When producing beneath the frontier, underutilization occurs
• Efficiency: using all resources in such a way to maximize the production of goods and services
  -increases profits
  
  
• Underutilization: opposite if efficiency
  -using fewer resources than an economy is capable of using.
  -leads to decrease in profits

• 4 assumptions:
  -Only two goods can be produced
  -Full employment of resources
  -Fixed resources (factors of production)
  -Fixed technology
  
  
• Three types of movements that occur within the PPC:
  -inside the PPC
  -along the PPC
  -shifts of the PPC
  
  
• Two types of Efficiency:
  1) Productive Efficiency
      -Products are being produced in the least costly way
      -This is any point on the PPC
  2) Allocative Efficiency
      -The products being produced are the most desired by society
      -This optimal point on the PPC depends on the desires of society.