Posted 240326T, 200917, 151112

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART I  Introduction

Chapter 2 of 36 Thinking Like An Economist

Section 5 of 13

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Figure 2 here

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Figure 2 - The Production Possibilities Frontier

The production possibilities frontier shows the combinations of output the economy can possibly produce, in this example cars and computers.

The economy can produce any combination on or inside the frontier.

Points outside the frontier are not possible given the economy's resources.

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If the economy of Figure 2 uses all its resources

· making cars, it will produce 1,000 cars and no computers

· making computers, it will produce 3,000 computers and no cars

More likely, the economy divides its resources between the two industries.

This results in the economy being on other points on the production possibilities frontier, such as

· point A, produce 600 cars and 2,200 computers

· point B, produce 700 cars and 2,000 computers

Because resources are limited, not every outcome is feasible.

The economy cannot produce the amount of cars and computers at point C.

With the resources it has, the economy

· can produce at any point on or inside the production possibilities frontier

· cannot produce at points outside the frontier

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An economic outcome is efficient if the economy is getting all it can from its available scarce resources.

As shown by Figure 2 when the economy is producing at point A, to produce more of one good it must produce less of the other.

Moving from point A to point B the economy now makes 100 more cars but 200 less computers.

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Point D represents an inefficient outcome, it is producing only 300 cars and 1000 computers.

For some reason, such as being in a recession or government over-regulation, the economy is producing less than it could with the available resources.

If the source of the inefficiency is eliminated, the economy can increase production of both cars and computers out to the production possibilities frontier.

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scarce resources

kishōna shigen

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