Transcript A simple Demonstration Production Possibilities Scarcity • We come to this world with many needs and desires while facing limited resources. • We cannot.

A simple Demonstration
Production Possibilities
Scarcity
• We come to this world with many needs and
desires while facing limited resources.
• We cannot have all we want!
• Given our limited resources, we have to
make choices.
• Every time make a choice in favor of one
option we forego one or more other options:
Opportunity costs
Production Possibilities of an
Economy: A simple Demonstration
A production possibilities curve or
frontier (or schedule) is a line drawn in a
two-dimensional space (or a table)
showing all the possible combinations of
two goods that an economy can produce
using all its available resources fully and
in the most efficient way it can.
Constructing a production
possibilities curve:
Assumptions:
• The economy produces only two goods (or
services)
• Given resources
• Given technology
• Full employment
• Full production
Production Possibilities Schedule
Product
Pizza
Robots
Production Choices
A
B
C
D
E
0 1
2
3
4
10 9
7
4
0
12
10
H.
8
Robots
6
4
U.
2
0
0
2
Pizza
4
6
Opportunity Costs
Every economic choice that we make entails a
cost; producing more robots requires that we
take some resources away from the production
of pizza, reducing the output of pizza. The
forgone pizza is the opportunity cost of more
robots.
The Shape of a PPC line
4 A straight-line PPC => Constant
opportunity cost=> perfectly substitutable
inputs (resources).
4 A curved (concave) PPC => Increasing
opportunity cost=>Imperfect substitutability
of inputs (resources).
A Straight-Line PPC
Food
Constant opportunity
Cost
A
B
J
K
Clothes
The Law of Increasing
Opportunity Costs
Given our limited resources, as more and
more of a product is produced (through
reallocation of resources), its opportunity
cost goes up.
Note: Resources are not perfectly
substitutable in and for all uses.
Economic Growth
The position and shape of a production
possibilities curve are determined by the
amounts of the basic economic resources
( land, labor, capital) and the level of
technology (or production method) used in
the economy.
What Makes an Economy Grow?
4 An increase in the size of labor force
4 An increase in the size of capital
4 An increase in the amount of land resources
4 An improvement in technology
Note: If an economy is operating under the
condition of unemployment (inside its
PPC), achieving full employment will also
result in economic growth.
Pizza(C)
(3)
(1)
A
(2)
B
0
Robots (K)
Figure 3: Technical Inefficiency
The Effect War of the Economy
• In wars resources are taken away from the
production of consumer and capital goods
and are reallocated to the production of
military goods and services.
• How does this reallocation of the economic
resources affect the economy now and in
the future?
• Can a war be economically justified?
Figure 4
Military Goods
A
B
o
Civilian Goods
Figure 5
Military Goods
Consumer Goods
Large Economy
Military Goods
Consumer Goods
Small Economy