3.1 ~The Productions Possibilities Frontier: Macroeconomic applications PPF (Production possibilities frontier) shows all possible combinations of goods & services that is possible to produce in this economy given its resources & technology (the line- shows maximum) • Will show u the max amount of good the economy can produce • Macro – uses aggregate goods (a group of economic units acting as a whole) • Consumption good = a good that provides immediate satisfaction (ex: clothing or food or entertainment or medical care – horizontal axis – not a specific good just an aggregate measure of consumer goods- representation) • Investment good = a good used to produce other goods (ex: capital or goods that produce other goods like a sewing machine or factory) • Investment = business spending • Product Possibilities schedule = table of data that shows; the maximum quantity of consumer goods that can be produced for any given quantity of investment goods produced • Increasing opportunity costs occurs b/c some resources are better suited to the production of consumption goods, while other resources are better suited to the production of investment goods • Points above the PPF are not achievable given resources and tech – indicates the reality of scarcity ; points under the PPF represent underemployment or unemployment • The downward slope reminds us of opportunity costs – there are trade offs • The cure gets steeper as we move down it b/c slope of curve reps opportunity costs…; steeper it gets =larger the opportunity costs are getting • Slope = rise (change in investment goods) Run ( change in consumption goods) • Outward bowed shape of PPF indicates increasing opp. Costs • If any variables that were previously held constant changes… the whole curve must be redrawn Ex: improvement in tech. increase the production of investment goods
• Economic growth results from the accumulation of resources which improves overall production Changes in PPF • War = overall output would be reduced b/c resources are being occupied or destroyed • An increase in immigration= overall output would increase because of an increase in labor • An improvement in technology for consumption goods= this improvement in technology increases the production of consumption goods Circular Flow Model Every time you spend money you create income for someone else Spending=Income Circular flow model = diagram illustrating the flow of spending & income in an economy Includes: Households (purchases- consumption; acquire $ by selling their resources like labor, land, etc) Firms (businesses; pay for factors of production w/money which becomes households income) Factors of Production: Households Factor markets Firms Goods & services Flow is clockwise starting with households/resources
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