Production possibility frontier

January 8, 2015

1. Scarcity vs. Shortage

• Scarcity- Is the most fundamental economic problem that all societies face, trying to to satisfy unlimited wants with limited resources. Its a permanent problem.
• Shortage- Is the quantity demanded greater than quantity supply. Its a temporary problem.

2. Goods vs. Services

• Goods is a material that satisfies human wants and provides utility. There are consumer goods and capital items.
• Consumer goods that are intended for final use by the consumer.
• Capital items used in the creation for other goods.
• Services is work perform for someone else.

3. Factors of Production

• Land: Natural resources.
• Labor: The work force.
• Capital: Human & Physical
• Human knowledge/skill gain through education and experience.
• Physical Human made object to create other goods and services.
• Entrepreneurship: Is is the process of starting a business or other organization, innovation people can take risk.

4. Production possibility frontier:  A production possibility graph shows how a good can be produced more than the other, having an inverse relationship to each other.

• Trade-offs alternative that we give up when we chose one course of action over another.
• Opportunity cost is the most desired alternative given up by making a decision.
• Guns and Butter model is the classic example of the production possibility frontie.
• Production possibility graph.
•  If point is in the production possibility curve it's efficient and attainable
•  If point is inside the curve it's attainable but inefficient. Causes can be recession, war/famine, underemployment, drop in population.
• If point it's outside the curve it's unattainable. Causes can be economic growth, new technology, discover new resources.