How can the PPF model illustrate the economic problem?

• Economists use models or diagrams to organise thinking and promote understanding about economic issues; models are simplified versions of reality

• An economy’s Production Possibility Frontier shows the possible output levels of two goods that can be produced using the economy’s current resources or factors of production

• The PPF can show the maximum amount of one product that is produced for each given level of output of another product; each PPF is drawn on the assumption that resources and technology are fixed and only two goods are produced

• The model helps show opportunity cost of moving from one of the production combinations to another; also shows the potential output

• The level of actual output will be somewhere inside the frontier if the economy is not operating at full capacity

When will the PPF be a straight line and when will it be a curve?

• If all the economy’s resources are equally productive when being used to make each product, the PPF will be a straight line

• Doubling the resources being used to make consumption goods will double the output of consumption goods

• In many cases however, the PPF will not be a straight line because the law of diminishing marginal returns is at work

• This law states that, given a fixed amount of other resources to work with, the output of a new worker, for example, will be less than the output of the previous workers, as adding extra workers dilutes the amount of capital equipment available to each worker and the new workers may not have the appropriate training or skills