Sunday, April 20, 2008

Using a PPF to Illustrate the Unemployment


A production possibilities frontier can be used to illustrate how the unemployment or misallocation of resources causes a society to produce fewer goods and services than possible. The diagram above illustrates the production possibilities for the U.S. economy. All products can be divided into two categories. Military products (e.g., guns) are measured on the vertical axis. Civilian products (e.g., butter) are measured on the horizontal axis.

If all U.S. economic resources are fully and efficiently employed in the production of military products, the output of the U.S. economy occurs at point A. If all U.S. economic resources are fully and efficiently employed in the production of civilian products, the output of the U.S. economy occurs at point E. Points B, C, and D (and all other points on the production possibilities frontier) represent possible combinations of military and civilian products that could be produced in the United States if its resources are fully and efficiently employed. Points on the production possibilities frontier are efficient because it is not possible to produce any more output of one product (e.g., guns) with the existing resources unless less output of another product (e.g., butter) is produced.

Points J, K, L, M, and N (and all points a similar distance from the PPF) represent U.S. output when there is relatively low unemployment or relatively low inefficiency. All points inside the PPF are inefficient because it is possible to produce more of one product without sacrificing the output of other products (by employing some of the unemployed resources or using them more productively).

Points S, T, U, V, and W (and all points a similar distance from the PPF) represent U.S. output when there is relatively high unemployment or relatively high inefficiency. Increases in unemployment or inefficiency move the production point further from the PPF (toward the origin) representing less output of goods and services.

Production point Z is not possible with existing resources and technology. (But if additional resources are acquired or technology increases productivity, it may be possible to move the entire PPF in that direction.)

If a societal goal is to satisfy as many needs and wants for material possessions as possible, then a society should strive to produce at a production point on (or close to) the PPF.

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