Transcript Gross Domestic Product

Production Possibilities
MODEL SHOWING ALL THE COMBINATIONS
OF TWO GOODS THAT CAN BE PRODUCED
WITH THE RESOURCES AND TECHNOLOGY
CURRENTLY AVAILABLE.
Production Possibilities
 Line that looks at the choices any society faces with
scare resources.
 Shows the following ideas:
1. Scarcity
2. Efficiency
3. Trade-Offs
1.
2.
Opportunity Costs
Constant Opportunity Costs & Increasing Opportunity Costs
4. Economic Growth
Production Possibilities
Example:
 The Pizza Shack can make two things:
Pizzas or Calzones
 It takes 15 minutes to make pizza or 20 minutes to make
a calzone
Production Possibilities
 In an 8 hour day, how many pizzas can The Pizza
Shack produce?
(It takes 15 minutes to make pizza or 20 minutes to make a calzone)

Answer: 32 pizzas
 In an 8 hour day, how many calzones can The Pizza
Shack produce?

Answer: 24 pizzas
 Note: It is possible to produce either 32 pizzas or 24
calzones – or some combination in-between – but it
is not possible to produce both 32 pizzas and 24
calzones.
Production Possibilities
Points on the line
show efficient production
Calzones
(resources are being fully utilized)
Points under the line
show inefficient production
(resources are NOT being fully utilized)
Points outside the line
show production that is
NOT currently possible
24
18
NOTE: The graph is an X and Y axis. Plan on
things being mathematically accurate!
12
6
8
16
24
32
Pizzas
Production Possibilities
Imagine wePoints
are current
on theproducing
line
18 Calzonesshow
and 8efficient
Pizzas (labeled
production
point A)
Calzones
(resources are being fully utilized)
Question:
Points
under the
the economy
line
What does
it “cost”
show8 inefficient
production
to produce
more pizzas?
(resources
areeconomy
NOT being
fullyfrom
utilized)
(what does
it cost the
to move
point A to point B)
Points outside the line
Answer:
show production that is
The cost – or opportunity
cost possible
– of
NOT currently
producing 8 more pizzas is 6 calzones
24
18
A
12
Question:
What is the opportunity cost of moving
from point B to point C?
B
6
C
8
16
24
32
Pizzas
Production Possibilities
 Opportunity Cost
 The highest valued foregone alternative
 What you give up to get something
 Does not have to mean money
 What is the opportunity cost of
coming to today’s class?
Production Possibilities
Question:
What is the opportunity cost of moving
from point A to point B?
from point B to point C?
from point C to point D?
from point D to point E?
Calzones
A
24
6 Calzones
B
18
6 Calzones
C
12
6 Calzones
D
6
6 Calzones
E
8
16
24
32
Constant Opportunity Costs
Pizzas
Production Possibilities
Question:
What is the opportunity cost of moving
from point A to point B?
from point B to point C?
from point C to point D?
from point D to point E?
Robots
Opportunity Costs increase
as production of one good
increases.
1 Robots
2 Robots
17
18
15
A
B
4 Robots
C
Principle of the Lowest
11 Robots Hanging Fruit:
Certain resources are
better suited at producing
certain goods or services.
D
11
Why?
E
8
16
24
32
Increasing Opportunity Costs
Pizzas
Production Possibilities
Robots
Question:
How can the Economy grow?
Answer:
Produce more stuff!
Growth is shown by the
PPF shifting outward.
How?
Increase the factors of
production or the
level of technology.
Pizzas
Economic Growth
Production Possibilities – Famous Examples
Goods
Guns
Services
Consumption Goods
Butter
Consumption vs. Capital shows the
trade-off between consumption vs.
growth
Guns vs. Butter shows the trade-off
between war-time goods and peacetime goods.
Capital Goods
Theory vs. Reality
 Question: Efficient Production (producing on the
line) is desirable – so why a society ever be under the
line (inefficient)?
 Theory Answer: Society may be under the line so
long as one of the factors of production is underutilized (if land, labor, capital or entrepreneurship is
under-utilized).
 Reality Answer: Society tends to be under than
line when labor is under-utilized. Being under the
line tends to represent unemployment or recessions.
Theory vs. Reality
 Question: How can be grow the economy?
 Theory Answer: Increase any of the factors of
production (increase the amounts of land, labor,
capital and entrepreneurship)
 Reality Answer: Society tends to grow the
economy by increasing the amount of capital or
technology.
Resource Allocating Mechanisms
Question:
How does any society choose what
amount of ‘guns and butter’ to
produce? Should they produce at
point A? Should they produce at point
D?
Society must have a mechanism to
determine this!
The options are as follows:
1. Brute Force
2. Tradition
3. Command or Centrally Planned
4. Markets
Guns
A
B
C
D
E
Butter
Linked to these ideas are Capitalism
and Socialism.
Capitalism and Socialism refer to the
ownership of the resources.
With Capitalism, resources are
privately owned.
With Socialism, resources are owned
by the government.
Resource Allocating Mechanisms
Economies can then be viewed as the following:
Market
Private
Resource Allocation
Market
Capitalism
USA
Command
Centrally
Planned
Japan
Capitalism
Sweden
Resource
Ownership
Hungary
Government
Market
Socialism
Yugoslavia
Centrally
PlannedSoviet
SocialismRussia
Wartime
USA
Most nations have market capitalist economies