ILLUSTRATING OPPORTUNITY COST FALL 2013 The Production Possibilities Curve

ILLUSTRATING OPPORTUNITY COST

FA L L 2 0 1 3

The Production Possibilities Curve

I. The Production Possibilities Frontier (curve)

Illustration of the trade-offs facing an economy, modeling only two goods

Shows the maximum quantity of one good that can be produced for any given production of the other

Visual representation of efficiency, opportunity cost – and often growth

The Production Possibility Frontier

Quan

tity

of c

ocon

uts

2820 400

30

9

15A

B

D

C

Quantity of fish

Increasing Opportunity Cost

A

10 20 30 40 500

35

30

25

20

15

10

5

Quan

tity

of c

ocon

uts

Quantity of fish

Economic Growth

A

10 20 25 30 40 500

35

30

25

20

15

10

5

E

NewPPF

OriginalPPF

Quan

tity

of c

ocon

uts

Quantity of fish

PPC PracticeDraw a PPC showing changes for

each of the following:Pizza and Robots

1. New robot making technology2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows

Consumer goods and Capital Goods4. BP oil spill in the Gulf5. Faster computer hardware6. Many workers unemployed7. Significant increases in education

6

New robot making technology

Qua

ntity

of R

obot

s

Quantity of Pizzas

Question #1

7

Decrease in the demand for pizza

Question #2

8

Qua

ntity

of R

obot

s

Quantity of Pizzas

Mad cow disease kills 85% of cowsQuestion #3

9

Qua

ntity

of R

obot

s

Quantity of Pizzas

BP Oil Spill in the Gulf

Qua

ntity

of C

apita

l Goo

ds

Quantity of Consumer Goods

Question #4

10

Faster computer hardware

Qua

ntity

of C

apita

l Goo

ds

Quantity of Consumer Goods

Question #5

11

Many workers unemployedQuestion #6

12

Qua

ntity

of C

apita

l Goo

ds

Quantity of Consumer Goods

Significant increases in education

Qua

ntity

of C

apita

l Goo

ds

Quantity of Consumer Goods

Question #7

13