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Chapter 1

Chapter 1. Section 3: Production Possibilities Curve. Production Possibilities. Economists use graphs to analyze the choices & trade offs that people make to help us see how one value relates to another value

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Chapter 1

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  1. Chapter 1 Section 3: Production Possibilities Curve

  2. Production Possibilities • Economists use graphs to analyze the choices & trade offs that people make to help us see how one value relates to another value • Production possibilities curve shows alternative ways to use an economy’s productive resources

  3. The axes of the graph can show categories of goods & services, or any pair of specific goods or services • Drawing a production possibilities curve • Start by deciding which goods & services to examine

  4. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 a (0,15) 8 14 b (8,14) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) c (14,12) d (18,9) e (20,5) A production possibilities frontier f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) • The production possibilities frontier is the line that shows the maximum possible output for that economy.

  5. Trade offs • Using the factors of production to make one product means that fewer resources are left to make something else

  6. Efficiency, Growth, & Cost • Graph shows us how efficient an economy is, whether an economy has grown or shrunk, & the opportunity cost of a decision to produce more of one good or service

  7. Efficiency • Production possibilities frontier represents an economy working at its most efficient level of production • Def.–using resources in such a way as to maximize the output of goods & services

  8. Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) • Any point inside the line indicates an underutilization of resources

  9. Growth • Production possibilities curve the country’s current production possibilities as if the country’s resources were frozen in time • In real time, the quantity of resources is constantly changing- curve will move

  10. When an economy grows, economists say that the entire production possibilities curve has “shifted to the right” • When a country’s production capacity decreases, the curve shifts to the left • Ex: war, aging population

  11. Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) • If more resources become available, or if technology improves, an economy can increase its level of output & grow.

  12. Cost • Not necessarily money • Def.- alternative we give up when we choose one option over another • Opportunity cost

  13. Law of increasing costs- as production switches from one item to another, more & more resources are necessary to increase production of the second item • Opportunity cost increases • As we move along the curve, we trade off more & more to get less & less additional output

  14. Production Possibilities Graph 25 20 15 10 5 Watermelons (millions of tons) Shoes(millions of pairs) 0 15 8 14 c (14,12) 14 18 20 21 12 9 5 0 Shoes (millions of pairs) d (18,9) 0 5 10 15 20 25 Watermelons (millions of tons) • To move from point c to point d on this graph has a cost of 3 million pairs of shoes.

  15. Resources & Technology • When economists collect data to create a production possibilities curve, they must first determine which goods & services a country can produce, given its current resources

  16. Land, natural resources, work force, & physical & human capital Technology • A country’s production possibilities depend on both its technological level & the resources it has available

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