Because Econ Isle's resources are scarce, each unit of a resource can be used to produce either widgets or gadgets, but not both. Let's say Econ Isle increases its production of widgets to 5. The people of Econ Isle would like to increase the production of both widgets and gadgets, but the PPF shows that this is not possible. Lesson 1: Because resources are scarce, not everyone's wants can be met. This situation illustrates our first lesson. So, despite wanting more production, Econ Isle has settled at 4 widgets and 4 gadgets. Put differently, there aren't enough resources to produce all the widgets and gadgets needed to fill the wants of the citizens of Econ Isle. In fact, all points below the frontier are attainable, but all points outside the frontier are unattainable with the current level of resources.Įcon Isle is feeling the effects of scarcity, which is the condition that exists because there are not enough resources to produce everyone's wants. The frontier also marks the line between what is possible and impossible for Econ Isle to produce.Īlthough the people of Econ Isle might want to produce and consume 5 widgets and 5 gadgets, the frontier shows there are not enough resources to produce that combination. This level is sometimes called full employment. Producing on the frontier assumes the economy is using all its resources and is using them efficiently. For Econ Isle, and any economy, the frontier represents maximum production with the available resources. By connecting the points to form a line, we get an approximation of Econ Isle's different production possibilities. Now let's plot Econ Isle's production possibilities on our graph. Given their productive resources, there are different combinations of widgets and gadgets they could produce.Ī PPF graph displays the different production options that are possible-or even impossible-for an economy. For example, Econ Isle might produce 4 gadgets and 4 widgets. Of course, the people of Econ Isle would probably prefer a mix of gadgets and widgets. On the other extreme, if it used all of its resources to produce widgets, Econ Isle could produce 6 widgets, but no gadgets. If all of Econ Isle's resources are used to produce gadgets, it can produce 12 gadgets. So, what are Econ Isle's production possibilities? In other words, capital resources are the tools the people of Econ Isle use to produce widgets and gadgets.Įcon Isle, like all economies, has a limited quantity of productive resources this means that the quantity of goods and services that Econ Isle can produce is also limited. It uses capital resources, which are goods that have been produced and are used to produce other goods and services. The people of Econ Isle work hard to produce all those widgets and gadgets. It uses labor, or human resources, which is the quantity and quality of human effort directed toward producing goods and services. Examples include water, trees, oil, and land used to produce crops. It uses natural resources, which are things that occur naturally in and on the earth that are used to produce goods and services. For example, let's imagine a single economy, the island nation of Econ Isle, that produces only two goods-widgets and gadgets.Įcon Isle is a closed economy, which means that it doesn't trade with any other countries. And in this case, it can easily be shown on a graph. Like most models, the PPF reflects a simplified version of reality. Today we're going to talk about this outer limit by using a simple economic model called the production possibilities frontier-the PPF. Whether you realize it or not, the economy has a frontier-it has an outer limit of economic production. Have you been to a frontier lately? You know, an outer limit or a border? When you hear the word "frontier," you might think of westward expansion, outer space, or even Alaska. It has not been edited for readability, and there may be slight differences between the text and the video. Read more about our award-winning resources »īelow is the full transcript of this video presentation. This lesson received the 2017 Curriculum Silver Award from the National Association of Economic Educators. Segment 3: The PPF Illustrates the Law of Increasing Opportunity Cost.Segment 2: The PPF Illustrates Underemployment, Economic Expansion, and Economic Growth.
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