Unit 1: Production

Shalom Akinwunmi
AP Economics
3rd Period
Factors of Production
  • Land: Natural resources
  • Labor: Work exerted
  • Capital -
  • Human Capital: The knowledge and skills a worker gains through education and experience
  • Physical Capital: Human made objects used to create other goods and services (tools, machinery)
  • Entrepreneurship: Risk takers who are innovative
Production Possibility Graphs (PPG, PPC, or PPF): Shows alternative ways to use resources
  • Each point on the graph shows trade-off
  • Shows the most that society can produce if it uses every available resource to the best of its ability
Key Assumptions
  • Full employment: 80-90% factory capacity; 4-5% unemployment
  • Productive efficiency:
  • Fixed resources: land, labor, and capital
  • Fixed state of technology
  • No international trade
  • Two goods produced
3 Movements of the PPG
Inside of the Curve
  • Underemployment
  • Unemployment
  • Recession
  • War
  • Natural Disaster
  • Famine

 Along the Curve
  • Producing less of one product and more of another

 Outside of the Curve
  • Resources are not currently available so there is a shift to the right

   Image result for ppg economics
Opportunity Costs: The next best alternative that you must give up in order to get something
  • Should I study for this quiz or hang out with my friends?
  • Settling for orange juice because the plane doesn’t have soda.
Law of Increasing Opportunity Cost: As you produce more of one good, the opportunity cost (the forgone production of another good) will increase.


Concave vs. Constant PPG
  • Concave: Curved graph
  • Constant: Straight line
Productive Efficiency: Products are being produced in the least costly way
  • Any point on the PPG, on the curve

Allocative Efficiency: The products being produced are the ones that are desired by the economy

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