Chapter 1 section 3: Production possibilities curve

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Chapter 1 section 3Production possibilities
curve

• Name __________________

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Production possibilities

• Production possibilities curve a graph that
  shows alternative ways to use an economys
  resources
• Axis shows categories of goods and services
  (farm goods, factory goods)
• Can also display any pair of specific goods or
  services (hats and shoes)

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Drawing a curve

• Begin by deciding which goods or services to
  examinelets go with farm goods and factory goods
  (shoes and watermelon)
• Therefore shoes and watermelons become the values
  shown on the graph
• 0 watermelons, all shoes0 shoes, all watermelons

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One more choice

• It isn't always all or nothingthere are other
  choices
• What if we wanted to make watermelons and shoes?
• If you plot those pointsyou have just drawn a
  production possibilities frontier-its shows the
  maximum combination for those two products

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Production possibilities curve
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Trade-offs

• Each point on the curve reflects a trade-off
• Examples the top has more shoes, but fewer
  watermelons
• The bottom has more watermelons, but fewer shoes
• Why? Land, labor, capital are scare
• More of one thing means less of another

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What can a graph show us?

• How efficient the economy is
• Whether the economy has grown or shrunk
• Opportunity cost of a decision to produce more of
  one good or service

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Efficiency

• The production possibilities frontier represents
  an economy working at its most efficient level of
  production
• Efficiency using resources in such a way as to
  maximize the production or output of goods and
  services
• Sometimes things happen (workers laid off, bad
  conditions)
• At any point inside the curveunderutilization
• Underutilization means using fewer resources than
  the economy is capable of using

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Growth

• The curve represents as if it were frozen in
  time, although the country and resources are
  constantly changing
• People, land, technology
• When an economy grows, economists say the entire
  production possibilities curve has shifted to
  the right
• When an economy shrinks, they say shifted to the
  left
• Go to war and lose land, population ages, becomes
  less healthy (labor and human capital) would
  decrease

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Cost

• Cost the alternative we give up when we choose
  one option over another
• ie opportunity cost
• When you go from no watermelons to 8 million tons
  of watermelons, what is the cost?
• What about 20 watermelons?
• Switching from shoes to watermelons cost
  somethingincreasing costs
• Each time we grow more watermelons, the sacrifice
  in terms of shoes increases
• Shows the it costs an additional 5 million pairs
  of shoes to increase watermelon production by
  only 1 million tons

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• Law of increasing costs
• As production switches from one item to another,
  more and more resources are necessary to increase
  production of the second item
• Opportunity cost increases
• Why?
• Because some resources are better suited for use
  in farming, while others are more appropriate for
  manufacturing. Moving resources from factory to
  farm production means that farmers must use
  resources that are not as suitable for farming.
• As we move along the curve, we trade more and
  more to get less and less additional output

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Resources and technology

• When economists collect data to create production
  possibility curves, they first determine which
  goods and services a country can produce, given
  its current resources.
• Land and natural resources, work force, physical
  and human capital (technology)