Production Possibility Diagrams

AS Economics

Aims and Objectives

Aim

Understand production possibility diagrams (PPD)

Objectives

Recap on economic systems

Define PPB diagrams Describe different PPB diagrams including how they can be used to explain opportunity cost.

Recap
Define

and give examples of a command economy. and give examples of a market economy. the three functions of prices and profits.

Define

Describe

Production Possibility Boundaries

Given a set of resources there is a maximum amount of goods and services an economy can produce.
We can show this using a diagram, with only two goods/services.

Production Possibility Boundaries

A Apple iPods Choice to produce iPods or Software. Pt 0D, 0C is a combination of producing both goods.

C B Computer Software

Production Possibility Boundaries

A Apple iPods

Pt 0, A choice to produce all iPods and no software.

B Computer Software

Production Possibility Boundaries

A Apple iPods Pt 0, B choice to produce all software and no iPods.

B Computer Software

Production Possibility Boundaries

The previous diagrams all show a level of output that is using all resources to their maximum potential. Any point on the PPB is where resources are being used efficiently. The points do not indicate whether or not they are the right combinations for maximising economic welfare.

Productive Efficiency
The

previous diagrams show productive efficiency and allocative efficiency. is when a firm operates at average minimum total cost, producing the maximum possible output (goods/services) from inputs (raw materials) into the production process.

This

Allocative Efficiency
This

is achieved in an economy when it is not possible to make anyone better off without making someone else worse off.

Or

you cannot produce one good without making less of another. at any points on the curve.

Achieved

SPEED DATING

Productive Inefficiency
E
Apple iPods F H G Pt E & G show allocative efficiency.

J Computer Software

Productive Inefficiency
Any

point within the PPB shows some resources are not being used. F shows that 0H iPods and 0J software is produced. it is possible to increase output of one good, without reducing the other.

Point

However,

Productive Inefficiency
E
Apple iPods F H
Pt F some resources not being used, which could have made society better off if used efficiently.

J Computer Software

Choice
The

PPD shows a potential range of choices. know what the best choice is.

Dont But

if all resources are used to the maximum potential we would achieve a point on the PPB

Task: Use the following diagram to explain opportunity cost

Work in groups Present to class

Apple iPods

Definition: Next best forgone alternative.

Computer Software

Opportunity Cost
E
Opportunity Cost

Apple iPods

H 0

F Computer Software

All points on the PPB are productively efficient and allocatively efficient

It is not possible to produce outside the PPB.

Points within the PPB are not using resources efficiently. Therefore possible to increase output without any changes in resources.
Shifts between two points on the PPB will carry an opportunity cost.

Team Teaching

In groups, prepare to teach the class the following:

Use the PPB diagrams to explain:

1)
2)

Allocative and Productive Efficiency.

Opportunity Cost

3)

Conflicts (trade offs) between economic objectives, such as building hospitals and building new road networks.
Criticise the theory.

4)