The Three Main Inputs 🏭

Factor Payments 💸

Each factor receives compensation:

Tourism Production: Example 📊

Hypothetical illustration of factor intensity

💡 Insight: Cruise tourism is capital-intensive, cultural tours are labor-intensive, beach resorts balanced

What is the PPF? 🗺️

Simple PPF Example: Tourism 🏖️

Imagine an economy producing only:

• Beach Tourism (hotels, resorts)
• Cultural Tourism (museums, tours, heritage sites)

Interpreting the PPF 🔍

Point A (0, 100): All resources → cultural tourism, no beach tourism

Point E (100, 0): All resources → beach tourism, no cultural tourism

Point C (60, 40): Mixed economy, balanced allocation

Point U (40, 30): Inefficient — inside PPF

• Resources unemployed or misallocated
• Could produce more of both goods!

Point X (80, 80): Unattainable — outside PPF

• Not enough resources with current technology
• Would need economic growth

Moving Along the PPF ➡️

From B (30, 70) to C (60, 40):

✅ Gain: 30 units of beach tourism

❌ Loss: 30 units of cultural tourism

💰 Opportunity Cost: 30 cultural units

Bowed-Out PPF: Increasing Opportunity Cost 🔄

💡 Why bowed out? Resources aren’t perfectly adaptable — some resources are better suited for beach tourism, others for cultural tourism

Calculating Opportunity Cost on PPF :calculator:

Example: Moving from C to D

Shifting the PPF Outward 🚀

PPF Shift Example 📈

Investment Trade-off: Present vs Future ⚖️

Key Economic Decision: Consumption today vs. Growth tomorrow

Investment Trade-off Visualization 💰

Tourism Investment Example 🏨

👉 Strategic choice: Prioritize long-term growth (infrastructure, digital) despite lower immediate returns

Technological Change Example 💻

PPF Summary: Key Insights 📑

1️⃣ Shows maximum production given resources & technology

2️⃣ Points on PPF = efficient (can’t produce more without trade-off)

3️⃣ Points inside PPF = inefficient (unemployment, waste)

4️⃣ Points outside PPF = impossible (currently unattainable)

5️⃣ Moving along PPF = reallocating resources (opportunity cost)

6️⃣ Shifting PPF outward = economic growth (more resources, better technology)

7️⃣ Investment trade-off = consumption today vs. growth tomorrow

Real-World Applications 🌍

PPF thinking helps answer:

❓ Should Portugal build more hotels or preserve more heritage sites?

❓ How much should airlines invest in fuel efficiency vs. passenger comfort?

❓ Trade-off between mass tourism revenue and sustainable tourism?

❓ How much GDP to allocate to tourism vs. other sectors?

Complete Picture: Integration 🧩

Today’s Lecture Integration:

1️⃣ Production Factors (Land, Labor, Capital) are scarce inputs

2️⃣ Scarcity forces choices between alternatives

3️⃣ PPF visualizes society’s production possibilities

4️⃣ Opportunity Cost = moving along PPF (what’s foregone)

5️⃣ Efficiency = operating on (not inside) PPF

6️⃣ Economic Growth = PPF shifts outward

7️⃣ Investment today enables faster growth tomorrow

Exercise 1: Multiple Choice

An economy is producing at a point INSIDE its PPF. This indicates:

A. The economy is efficiently using all resources

B. The economy has economic growth

C. There is unemployment or resource misallocation

D. It’s impossible to produce more of any good

Exercise 2: Multiple Choice

A country’s PPF shifts outward. This could be caused by:

A. Higher unemployment

B. Decrease in the labor force

C. Technological innovation

D. Producing less capital goods

Exercise 3: Open Question - Setup

Scenario: The Portuguese Algarve region has limited land and labor. It can allocate resources between golf tourism and beach tourism. Current production possibilities:

Exercise 3: Questions

Questions:

1. Draw the PPF with Golf Resorts on x-axis, Beach Hotels on y-axis

2. Calculate the opportunity cost of moving from:

   • Point B to Point C
   • Point D to Point E

3. Does the PPF exhibit increasing opportunity costs? Explain.

4. If region currently operates at point U (12 golf, 30 beach), what does this indicate?

5. A new tourism development technology is invented. How would this affect the PPF? Draw the new curve.

Exercise 3: Solution - Part a (PPF Graph)

a) The PPF shows all efficient combinations (points A-F) and the bowed-out shape indicating increasing opportunity costs.

Exercise 3: Solution - Part b

b) Opportunity Cost Calculations:

B → C (5 golf → 10 golf): \[\text{Gain in Golf} = 10 - 5 = 5 \text{ resorts}\] \[\text{Loss in Beach} = 48 - 44 = 4 \text{ hotels}\] \[\text{Opportunity Cost} = \frac{4 \text{ hotels}}{5 \text{ resorts}} = 0.8 \text{ beach hotels per golf resort}\]

Exercise 3: Solution - Part b continued

D → E (15 golf → 20 golf): \[\text{Gain in Golf} = 20 - 15 = 5 \text{ resorts}\] \[\text{Loss in Beach} = 38 - 30 = 8 \text{ hotels}\] \[\text{Opportunity Cost} = \frac{8 \text{ hotels}}{5 \text{ resorts}} = 1.6 \text{ beach hotels per golf resort}\]

Exercise 3: Solution - Part c & d

c) Increasing Opportunity Costs?

YES! Opportunity cost increases from 0.8 (B→C) to 1.6 (D→E).

Explanation: As more resources shift to golf, we use resources less suited for golf (originally better for beaches). Each additional golf resort requires sacrificing more beach hotels.

d) Point U (12 golf, 30 beach):

This is INSIDE the PPF (compare to point D: 15 golf, 38 beach).

Indicates:

• Inefficiency (unemployment or resource misallocation)
• Could produce more golf without reducing beach (move to D: 15 golf, 38 beach)
• Could produce more beach without reducing golf

Exercise 3: Solution - Part e

e) New Technology Effect:

Technology shifts PPF OUTWARD (economic growth).

New PPF might be:

Effect: Can now produce MORE of both types of tourism with same resources!

Graph: Draw original PPF, then new PPF further from origin (parallel or biased depending on where technology applies).

Next Lecture 📚

February 19, 2026: Budget Set and Budget Constraint

💡 Preparation: Think about how you allocate your own limited budget across different goods!

Next class: Thursday, February 19, 2026