AS EconomicsProduction Possibility Boundaries

To get you started…

• Imagine a firm that produces two products. What are they?

• Can the firm produce as many of the two products as they want?

• Why? Why not?• Can you show how this could

work on a graph?

Today’s objectives

• Be able to draw a production possibility diagram

• Use a PPB to explain opportunity cost• Be able to explain:Þ Allocative efficiencyÞ Productive efficiencyÞ A shift in the PPB

PPB Curve for books and bread

Economics Graphs

• Good Size• Label each axis• Label each point• Explain clearly what your

graph is showing

What is happening at points A and B ?

• We call these points productive efficiency• When the firm is productively efficient, it

is not wasting resources or under using them.

What is happening at points A and B?

• We also call these points allocative efficiency• When the firm achieves allocative efficiency, it cannot

make anyone better off without making someone worse off.

• EG, it can’t produce more cars without reducing the number of refrigerators

What is happening at point D ?

• It is possible to produce more of either good without reducing production of the other

• Some resources not being used• Inefficient use of some resources

What is happening at point C?

• Impossible to achieve• There are not enough resources to

produce at C

• If the firm is currently producing at A, how many books and how much bread is being produced?

• If the firm wants to move to B, what will have to happen?

Opportunity cost

• What has to be given up as the result of a particular decision

• EG the opportunity cost of moving from A to B is 200 loaves of bread

• What is the opportunity cost of you staying on at sixth form?

Summary

• All points that lie on the PPB must be productively and allocatively efficient

• It is not possible to achieve output levels beyond the PPB

• Points within the PPB are not using all the resources to full capacity

• Shifts between two points on the PPB will always carry an opportunity cost

How could this happen?

1. Finding new resources2. Improving technology3. Improved productivityWhat does this mean for society?

How could this happen?

Improving skills and abilities of workers1. Division of labour in book production2. Specialisation of workers in book production3. Investment in new technology to produce booksWhat does this mean for society?

Today’s objectives

• Be able to draw a production possibility diagram

• Use a PPB to explain opportunity cost• Be able to explain:Þ Allocative efficiencyÞ Productive efficiencyÞ A shift in the PPB