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Production Possibilities

Production Possibilities. Homework and Chores. What have you learned to complete homework and/or chores more quickly and efficiently? What has caused the U.S. to become more productive since when your parents were young?. WWII.

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Production Possibilities

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  1. Production Possibilities

  2. Homework and Chores • What have you learned to complete homework and/or chores more quickly and efficiently? • What has caused the U.S. to become more productive since when your parents were young?

  3. WWII • During WWII, the U.S. converted the nation’s factories from producing consumer goods, such as cars and clothing, to making tanks, guns and other good necessary for the war effort.

  4. Trade-offs • This scenario represents the classic questions that a country faces: • What goods should be produced? • What are the trade-offs between “guns” or “machinery” (capital goods) and “butter” (consumer goods) • With limited resources (land, labor, capital and entrepreneurial ability), a nation can produce limited goods and there is an opportunity cost, or trade-off. • With the production of more tanks, less cars can be produced

  5. Production Possibilities Frontier • Economists, governmental officials, businesses, and individuals continually strive to increase productivity and efficiency because an economy has limited resources which can be combined in various ways to produce a variety of goods and services. • Deciding what to produce requires choices and involves opportunity costs and tradeoffs for nations, individuals, and businesses. • Economists use a simple model to describe an economy’s possible production, current production, and potential production called the Production Possibilities Frontier or Production Possibilities Curve. • The model shows the possible combinations of the 2 types of goods that can be produced when available resources are employed fully and efficiently

  6. Production Possibilities Frontier • The PPF curve is a simple model showing the alternatives of goods and services which a society can produce when it’s using all of its resources fully and efficiently • The PPF curve is a boundary dividing the points on the inside (which show under-utilization or inefficient use of resources) from those beyond the line which are unattainable given the current resources and technology of the country • A shift in the boundary would reflect economic growth and an increase in available resources

  7. Assumptions of a PPF • Production possibilities tables and curves are used to illustrate the economizing problem of scarcity. The curve and points on the line assume: • Nation/business is operating efficiently (full employment and full production). • Resources are fixed in quantity and quality. • Technology is constant during analysis. • Nation/business is producing only TWO types of products (ex/ farm products and manufactured goods). • It is possible to produce a combination of these two goods.

  8. Resources available: Your business has 6 pieces of paper to produce either paper airplanes or paper footballs. What are your production possibilities? You can make 1 airplane or 2 footballs with each sheet of paper. Finish the chart and graph your results

  9. Resources available: Your business has 6 pieces of paper to produce either paper airplanes or paper footballs. What are your production possibilities?

  10. Footballs 12 10 8 6 4 2 0 0 1 2 3 4 5 6 Airplanes Deriving a PPF • Steps: • 1. Place each good on an axis • 2. Use the schedule to plot the points • 3. CONNECT THE DOTS to form a curve

  11. Deriving a PPF Footballs • Steps: • 1. Place each good on an axis • 2. Use the schedule to plot the points • 3. CONNECT THE DOTS to form a curve 12 10 8 6 4 2 0 0 1 2 3 4 5 6 Airplanes

  12. Footballs 0 1 2 3 4 5 6 Airplanes Deriving a PPF • Steps: • 1. Place each good on an axis • 2. Use the schedule to plot the points • 3. CONNECT THE DOTS to form a curve 12 10 8 6 4 2 0

  13. Footballs 0 1 2 3 4 5 6 Airplanes Production Possibilities Frontier 12 10 8 6 4 2 0 • Efficiency: producing the maximum possible output from available resources • The curve (the line) represents what isattainable and efficient • The points along the line represent maximum possible combinations of the two goods without new technology or growth • Note: Optimal or best product-mix will be some point on the curve, but the exact point depends on society; this is a normative decision.

  14. Footballs 0 1 2 3 4 5 6 Airplanes Inefficient or Unattainable • I represents inefficient use of resources, but are attainable • Points inside the curve represent underemployment or unemployment of resource available to the society at that time • U represents unattainable combinations • Points outside the curve cannot be attained, the nation/business does not have the available resources to produce at that level. 12 10 8 6 4 2 0 U I

  15. Opportunity Cost and the PPF • Movement along line: The shape of PPF shows opportunity costs of producing more of one type of good over the other.

  16. Straight or Bowed? • The PPF will be straight if the economy has resources that are perfectly adaptable to producing both goods • The PPF will be bowed out when resources in the economy are not all perfectly adaptable to the production of both types of goods

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