Introduction to Unit 1 - The Production Possibilities Frontier

The goal of this section is to introduce the topic of Macroeconomics and to present the Production Possibilities Frontier (PPF).

The PPF is used to better understand the basic economic problems of scarcity and choice. Scarcity is the most basic of problems. Unless you happen to be Bill Gates (hi Bill) or some other filthy rich individual, you understand scarcity well. Scarcity deals with the fact that for the majority of us, our materialistic wants are beyond our financial means of satisfying those objectives. Most of us wouldn't mind owning a few extra vacation homes in addition to the mansion. Our many cars and months spent in Maui would be a great complement to our well-compensated job.

But, given the scarcity of financial resources that we face, we must ponder choices. Forget the vacation homes, you may deal with a more important question: can I afford a two-bedroom apartment. Economics deals with the choices that we face in spending our limited money income and savings.

We use the production possibilities frontier to help us understand in an economic context the constraints caused by scarcity and the resulting choices. If you are taking microeconomics, choice will often be described in terms of the individual's or firm's decision. In macroeconomics, choice has a broader interpretation and looks at public policy questions such as a reduction in the federal budget deficit and cuts in popular federal programs.

One thing to emphasize not only for this section, but also for the entire course, is the PPF represents a model of the economy. Models are highly simplified representations of a theory about actual events. Models are not designed to explain everything, but will be used in this course to help you understand the main points being presented. After reading about the PPF, you should have a fundamental understanding of the economic representation of scarcity and choice. Once we have covered this material, we can extend the discussion to other important economic issues such as international trade and economic development.

Outline of Unit 1

• Scarcity, Choice and the Production Possibilities Frontier
  
  • The Economic Problem of Scarcity
    
  • Choice
    
  • Opportunity Cost
    
• Production
  
  • Introduction to Production
    
  • The Factors of Production
    
• The Production Possibilities Frontier
  
  • Introduction to Production Possibilities Frontier (PPF)
    
  • Assumptions of the Production Possibilities Frontier
    
  • Characteristics of the Production Possibilities Frontier(Summary)
    
• Application
  • Applications of the Production Possibilities Frontier
    
    • Inefficient Use of Resources
      
    • Expansion of the Economy's Productive Capacity
      
    • A Contraction of the Production Possibilities Frontier
      
    • The Tradeoff between Current Consumption and Capital Investment
      
    • The Tradeoff between Current Consumption and Improved Environmental Quality
      

LINK TO MAIN SECTION OF UNIT 1 - THE PRODUCTION POSSIBILITIES FRONTIER