Production Possibilities Main

8/6/2019 Production Possibilities Main

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Production Possibilities


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When faced with SCARCITY of

resources, decisions have tobe made about how to use

those resources

Trade-offs

Opportunity Costs


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Trade-Offs

This is the decision making process that is occurring inyour mind right now!

Am I going to pay attention to what Mr. Hayward issaying, or am I going to daydream?

Am I going to come to class or go buy a lottery ticket? Am I going to stay in school or go find a full time job?

Each and every decision you make has a cost!! Notnecessarily a cost in dollar terms, but a cost in that

you must give up something in order to get more ofsomething else.


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Opportunity Cost

The price you pay for each decision youmake is called the OPPORTUNITY COST.

Opportunity cost is vital to the

understanding of economics.

The amount of a product or service that

must be forgone (given up) in order toobtain more of the next best alternativeproduct or service


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Production Possibilities Frontier

Used to illustrate:

Productive Capacity

Opportunity Costs

Efficiency

Productive

Allocative

Economic Growth/Decline

Vital Link to Aggregate Supply (short/long run)


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Wheat

Rice

0

Production Possibilities FrontierIncreasing Opportunity Costs

Wheat Rice

NOTE: The GAIN in Rice is

CONSTANT while the LOSSIn Wheat is INCREASING

each TimeWhat is going

on???

80

78

7055

38

0

0

20

4060

80

100

80

70

60

50

40

20

10

10 20 30 40 50 60 70 80 90 100

. . ..

.

.

-2

-8

-15

-17

-38

+20

+20

+20

+20

+20


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Production Possibilities FrontierIncreasing Opportunity Costs

The type of land resource suitable for growing

Wheat is DIFFERENT than the land resource for

growing Rice.

If a society wants MORE Rice, then as youconvert land suitable for growing Wheat (arable,

relatively dry) so that you can grow Rice (wet,

swampy) it will become MORE costly to do that,

in terms of Wheat production

We have INCREASING OPPORTUNITY COSTS

of producing Rice in terms of Wheat


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Economys produce MORE that just

Wheat and Rice.

We produce LOTS of goods of many

different types.

We can broadly categorize goods into

TWO categories

Capital Goods and Consumer Goods


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The best way to illustrate Trade-Offs and

Opportunity Costs is to use a Production

Possibilities CurveThe PPC shows the relationship between two goods:

1. Capital Goods (Investment Goods)Goods that satisfy our wantsINDIRECTLYand promote futuregrowth or happiness Delayed

gratification.2. Consumer Goods

Goods that satisfy our wants DIRECTLY.

Instant Gratification

Lesson 1 Act 1


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CapitalGoods

Consumer Goods

0

Capital Goods

Stuff you use to make otherStuff

Tools, equipment, factories, other

infrastructure

Consumer GoodsStuff for immediate

Consumption. Food, consumerElectronics, etc.

Allocative EfficiencyWhere a society decides to

Produce on its PPF. A value

Decision based on values/politics

Productive EfficiencyFull-employment of resources

And producing at the lowest

cost

.A

.B .C

.D

.E



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Production Possibilities Curve (Frontier)

The reason the PPC is bowed is

because of INCREASING

OPPORTUNITY COSTS.

At Point A the economy givesup 10 capital goods in order to

get 400 consumer goods.

400 Consumer goods = 10 Capital goods

1 Consumer good = 10 Capital goods/400 1 Consumer good = .025 Capital good

Consumer Goods

Capital

Go

ods

0

100

1000

10

20

30

40

50

60

70

80

90

100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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The reason the PPC is bowed isbecause of INCREASINGOPPORTUNITY COSTS.

At Point B the economy gives up 10 Capitalgoods in order to get 200 more Consumergoods.

200 Consumer goods = 10 Capital goods

1 Consumer good = 10 Capital goods/200

1 Consumer good = .05 Capital good

Consumer Goods

Capital

Go

ods

0

100

1000

10

20

30

40

50

60

70

80

90

100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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The bowed nature of the PPC is due toINCREASING OPPORTUNITY COSTS

Not all resources are adaptable to alternativeuses.

Resources used for Capital Goods may not besuitable to make Consumer Goods (and ViceVersa)

Marsh land suitable for growing rice could noteasily be converted for use as a an airport. Itwould be much more costly than usingfarmland in Kansas.

Consumer Goods

Capital

Go

ods

0

100

1000

10

20

30

40

50

60

70

80

90

100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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Lets take a closer

look at the PPC.

What do the different

points on the PPC

represent?

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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Each point represents

Productive Efficiency

This means that thiseconomy is allocating

ALL of it productive

resources in the least

costly way

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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There are an infinitenumber of points onthe PPC. Where asociety decides toproduce is calledAllocative Efficiency This represents the

combination of Capital

and Consumer Goodsmost desired by thesociety

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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The WHOLE PPC

represents

FULL

PRODUCTION Productive Efficiency

Full-Employment of

Resources

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C.D


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Do economys always

produce on the PPC?

No! Often they operateinside their production

possibilities

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C

.D

E


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Do economys always

produce on the PPC?

Point E represents apoint inside the PPC.

Notice that this point E

represents a lowerbundle of Capital and

Consumer Goods

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C

.D

.E


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Do economys always produce

on the PPC?

Point E represents a point

inside the PPC.

The area between point E and

the PPC represents

underutilization of resources

or under-employment ofresources or unemployment.

The economy is being

inefficient.

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C

.D

.E


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Do economys always produce on

the PPC?

How about point F?

Point F is outside our PPC

It represents a combination of

Capital and Consumer Goods

that is currently not possible

with this economies resources

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C

.D

E

.F


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Do economys always

produce on the PPC?

How about point F?

Point F is outside our PPC

This point is desirable(more stuff) but

currently not attainable.

Consumer Goods

0

100

1000100 200 300 400 500 600 700 800 900

.A

.B

.C

.D

E

.F


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CapitalGoods

Consumer Goods

0

Capital Goods

Stuff you use to make otherStuff

Tools, equipment, factories, other

infrastructure

Consumer GoodsStuff for immediate

Consumption. Food, consumerElectronics, etc.

Allocative EfficiencyWhere a society decides to

Produce on its PPF. A value

Decision based on values/politics

Productive EfficiencyFull-employment of resources

And producing at the lowest

cost

.A

.B

.C

.D

.E

.F

.G



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Production Possibilities CurveThe PPC shows ALL possible combinations of two goods

that can be produced ifALL available resources are fully

employed (used) with the best technology currently available

Robotics(Capital Good)

Compact Discs (Consumer Good)

B

C

E

F

A

G

How do we get to point G??

1. Technological advancement which increases Productivity

2. Discover new resources

3. Take resources (War)

4. Trade for Resources

D

OUR ECONOMY IS DRIVEN BY TECHNOLOGICAL ADVANCEMENT

CAN YOU THINK OF AN EXAMPLE IN HISTORY WHEN WE WERE INSIDE THE PPC


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Production Possibilities CurveThe PPC shows ALL possible combinations of two goods

that can be produced ifALL available resources are fully

employed (used) with the best technology currently available

Robotics(Capital Good)

Compact Discs (Consumer Good)

B

C

E

F

A

G

How do we get to point G??

1. Technological advancement which increases Productivity

2. Discover new resources

3. Take resources (War)

4. Trade for Resources

D

OUR ECONOMY IS DRIVEN BY TECHNOLOGICAL ADVANCEMENT

CAN YOU THINK OF AN EXAMPLE IN HISTORY WHEN WE WERE INSIDE THE PPC

Economic resources are not completely


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PPossibilitiesossibilities-A, B, C, D, & E-A, B, C, D, & E

ImpossibilityImpossibility[more/better resources, better technology]

Economic resources are not completelyadaptable to alternative uses.The curvecurve indicates achanging trade-off.changing trade-off.Obtaining more of one goodmore of one good requires giving upgiving up

larger amounts of the alternative goodlarger amounts of the alternative good..


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So, How IsSo, How Is Economic GrowthEconomic Growth DemonstratedDemonstrated

on aon a PPC Graph?PPC Graph?

Economic GrowthEconomic Growth

e

[Ability to produce a larger[Ability to produce a larger

total output over time]total output over time]

CapitalG o

od

s

C

0 Consumer Goods

a

d

f

b

O C O OSS SPRODUCTION POSSIBILITIES


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Two Examples of Economic GrowthTwo Examples of Economic Growth

FAVORING PRESENT GOODSFAVORING PRESENT GOODS

Goods for the PresentGoods

fo

rtheFutu

re

Goods

fo

rth

eFuture CURRENTCURRENT

CURVECURVE

CONSUMPTIONCONSUMPTION

PRODUCTION POSSIBILITIESPRODUCTION POSSIBILITIES



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FAVORING PRESENT GOODSFAVORING PRESENT GOODS


fo

rtheFutu

re

Goods

fo

rth


CURVECURVE

CONSUMPTIONCONSUMPTION




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FAVORINGFAVORING

PRESENT GOODSPRESENT GOODSFAVORINGFAVORING

FUTURE GOODSFUTURE GOODS


fo

rth


CURVECURVE

FUTUREFUTURE

CURVECURVE

CONSUMPTION

Goods for the PresentGoodsforth

eFuture

FUTUREFUTURE

CURVECURVE

CONSUMPTION

CURRENTCURRENT

CURVECURVE


Going to War (U S )Going to War (U S ) Wh th U S t d WWI h d l t


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Going to War (U.S.)Going to War (U.S.)When the U.S. entered WWI, we had severe unemployment.We were able to step up production of consumer goods and war materials simply by

getting to full production. We went from 14.6% unemployment in 1940 to 1.2% in 1944.

Over7 million people went to work that were not working in 1940.

Going to War(Russia)Going to War(Russia).Russia, on the other hand, entered WWII at full capacity.So their preparedness entailed a shifting of resourcesfrom civilian goods and a drop intheir standard of living.

The U.S.position was similar as weentered the Viet Nam War at full employment.

We increased both military spending and domestic spending on the War on

Poverty. Our attempt to achievemore guns and butter in a FE economy was

doomed. We were trying to spend beyond capacity and ended up with doubledigit inflation in the 1970s.

Civilian GoodsCivilian Goods

FF

CC United StatesUnited States[Beginning of WWII][Beginning of WWII]

War GoodsWar Goods

War GoodsWar Goods

DD

CCRussiaRussia

[Beginning of WWII][Beginning of WWII]

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Production Possibilities Main