CHAPTER 2: Production Possibilities Curve

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CHAPTER 2Production Possibilities Curve
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Production Possibilities

• Assumptions
• full employment productive efficiency
• fixed resources
• fixed technology
• two goods
• pizzas symbolize consumer goods
• industrial machines symbolize capital goods

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Production Possibilities

• What if we could produce only
• 10,000 machines

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Production Possibilities
to get some pizzas we have to give up some
machines!

• What if we could produce only
• 10,000 machines
• or
• 400,000 pizzas
• using ALL of our resources

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Production Possibilities
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Production Possibilities
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Production Possibilities
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Production Possibilities
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Production Possibilities
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Production Possibilities
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Production Possibilities
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Production Possibilities
Figure 2-1
A
B
C
W
attainable but inefficient
unattainable
D
E
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Production Possibilities

• Law of Increasing Opportunity Cost
• opportunity cost increases with amount produced
• as we make more pizzas, the of machines we have
  to give up (per pizza) increases
• illustrated...

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Production Possibilities

• opportunity cost of 1st 100,000 pizzas
• 1,000 machines

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Production Possibilities

• opportunity cost of 2nd 100,000 pizzas
• 2,000 machines

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Production Possibilities

• opportunity cost of 3rd 100,000 pizzas
• 3,000 machines

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Production Possibilities

• opportunity cost of 4th 100,000 pizzas
• 4,000 machines

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• Opportunity Cost 1st Pizza Unit 1 Robot Unit
• Opportunity Cost 2nd Pizza Unit 2 Robot Units
• Opportunity Cost 3rd Pizza Unit 3 Robot Units
• Opportunity Cost 4th Pizza Unit 4 Robot Units

the more pizzas we make, the more each one
costs, in terms of machines foregone
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Production Possibilities

• Law of Increasing Opportunity Cost
• as we make more pizzas, the of machines we have
  to give up (per pizza) increases
• so production possibilities curve gets steeper
  and steeper

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Production Possibilities
Figure 2-1

• 1st pizza unit costs 1 machine unit

A
B
C
D
E
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Production Possibilities
Figure 2-1

• 2nd pizza unit costs 2 machine units

A
B
C
D
E
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Production Possibilities
Figure 2-1

• 3rd pizza unit costs 3 machine units

A
B
C
D
E
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Production Possibilities
Figure 2-1

• 4th pizza unit costs 4 machine units

A
B
C
D
E
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Production Possibilities
Figure 2-1

• the more pizza we make, the more machines we give
  up
• the steeper the curve

A
B
C
D
E
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Production Possibilities

• Shape of the Curve
• concave to the origin
• Economic Rationale
• resources are not completely adaptable to
  alternative uses