PPF - THE FUNDAMENTALS OF ECONOMIC THINKING THE PRODUCTION...

THE FUNDAMENTALS OF ECONOMIC THINKING
THE PRODUCTION POSSIBILITIES FRONTIER
Land
All the gifts of nature. The forest, minerals, and oceans proven: unproven land and
everything undimmed.
Labor
The physical & mental talents that people contribute to the production process.
Capital
Goods that are produced to be used for further production.
a) Physical Capital Things like machines, computers, etc.
b ) Human Capital The accumulated skills/knowledge that gain through their
education/training.
Entrepreneur
The organizing factor of production. The entrepreneur is a risk taker and is someone that
has the foresight & ingenuity to bring together the factors of production.
Capital Goods
Goods that can be reused.
Consumption Goods
Goods that when you consume them once, then they are gone.
TANGIBLE vs. INTANGIBLE GOODS
Tangible Goods Goods that have physical form & shape
Intangible Goods Goods that don’t have physical form or shape e.g. services
DIVISIBLE vs. INDIVISIBLE GOODS
Divisible
Goods that can be brought or sold in whatever unit you want, in a smaller unit. E.g. gas
Indivisible
Goods that can only be brought & sold in whole units. e.g. prepackage rice. You can
only buy rice in the package, you can’t split it up. eg. a movie

SPECIALIZED vs. UNSPECIALIZED RESOURCES
Specialized
A resource that is better suited in the production of a particular good.
Unspecialized
A resource that is equally suited in the production of all goods.
THE PRODUCTION POSSIBILITY FRONTIER (PPF)
Our limited resources and the technologies available for transforming those resources into
goods and services limit what can be produced. The limit is described by the Production
Possibility Frontier.
The PPF represents the possible combinations of two goods that an economy can produce in a
certain period of time; under the conditions of a given state of technology, no unemployed
resources and efficient production. The PPF marks the boundary between those combinations
of goods and services that can be produced and those that cannot.
Assumptions:
1) The are only two goods that the society produces
2) All the resources are fully utilized
3) Production is taking place efficiently
The PPF represents or depicts the various combinations of two goods that a society can
produce during a given time period with a given amount of resources, given state of
technology with no unemployed resources and with efficient production.