Unit 1: Production possibility graphs

1/05/17

Production Possibility Graphs

• Production possibility graphs- shows alternative ways to use an economy's resources.
• The line or "PPG" is known as the frontier or curve, when producing at the frontier efficiency occurs.
• When producing beneath the frontier under utilization occurs.

-Efficiency- using all resources such a way to maximize the production of goods and services  (increases profit)
- Under utilization using fewer resources than an economy is capable of using , this leads to a decrease in profits.

1/06/17

• Point A- attainable and efficient
• point X- attainable and inefficient (recessions and famines; this is due to unemployment and underemployment)
• Point Y- unattainable using current resources

4 Key Assumptions

1. Only 2 goods can be produced
2. Full employment of resources
3. Fixed resources (factors of production 
4. Fixed technology

3 Types of Movement Along The PPC

1. Inside of the PPC
2. Along the PPC
3. Shifts of the PPC

2 Types of Efficiency

1. Productive efficiency- products are being produced in the least costly way

-This is any point on the production possibility curve

      2. Allocative Efficiency- the products being produced are the ones most desired by society, this optimal point on the PPC depends on the desires of society.

1/11/17

Price Elasticity of Demand 

• This is the measure of how consumers react to a change in price.

1. Elastic Demand- demand that is very sensitive to a change in price. 

- product is not a necessity, substitutes.

- Ex: soda, fur coat, pizza ( E>1)

     2.  Inelastic Demand- demand not very sensitive to a change in price.

- product is a necessity, there are few or no substitutes for these. 

- Ex: gas, salt, insulin ( E<1)

     3. Unitary Elastic- If a change in price of that good causes an equal change in quantity demand.

- ( E=1)