Transcript Chapter 1 section 3: Production possibilities curve

Chapter 1 section 3:
Production possibilities curve
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Production possibilities
• Production possibilities curve: a graph that
shows alternative ways to use an economy’s
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)
Drawing a curve
• Begin by deciding which goods or services to
examine…lets go with farm goods and factory goods
(shoes and watermelon)
• Therefore shoes and watermelons become the
values shown on the graph
– 0 watermelons, all shoes…0 shoes, all watermelons
One more choice
• It isn't always all or nothing…there are other
choices
• What if we wanted to make watermelons and
shoes?
• If you plot those points…you have just drawn a
production possibilities frontier-its shows the
maximum combination for those two products
Production possibilities curve
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
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
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 curve=underutilization
• Underutilization means using fewer resources than the
economy is capable of using
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
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
something…increasing 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
• 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
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)