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Production Possibilities Curve
Production Possibilities Curve
A graph that illustrates the possible output combinations for an economy
It illustrates the tradeoffs that society faces in using its scarce resources◦ A choice is necessary because producing more of one item means making do with less of the other
The Production Possibilities Model
The production possibilities model is based on three assumptions:◦ an economy makes only two products
◦ resources and technology are fixed
◦ all resources are employed to their fullest capacity
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Production Possibilities Curve
The production possibilities curve shows a range of possible output combinations for an economy.◦ It highlights the scarcity of resources.
◦ It has a concave shape, which reflects the law of increasing opportunity costs.
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Production Possibilities Curve
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Production Possibilities Schedule
Hamburgers Computers point
on graph
Production Possibilities Curve
0 1 2 3
1000
600
b
c
1000 0 a
900 1 b
600 2 c
0 3 dComputers
Ha
mb
urg
ers
e
f
inefficient
unattainable
d
900
a
Production Efficiency
Achieved when it is not possible to produce more of one good without producing less of the other good
Occurs only at points on the production possibility curve
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Law of Increasing Opportunity Cost
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Production Possibilities Schedule
Hamburgers Opportunity Computers point
Cost of on graph
Computers
Production Possibilities Curve
0 1 2 3
1000
6001000 0 a
100
900 1 b
300
600 2 c
600
0 3 d
ComputersH
am
bu
rge
rs
As the quantityof computers
rises, so does theiropportunity cost.
a
b
900
c
d
Law of Increasing Opportunity Cost
The concept that as more of one item is produced by an economy, the opportunity cost of additional units of that product rises
Formula to calculate opportunity cost
Opportunity Cost = Give up
Gain
Further Understanding of the Opportunity Cost Calculation
Further Understanding of the Opportunity Cost Calculation
Opportunity Cost = Give upGain
Opportunity cost of one computer= 4-7 televisions = - 3 = -1.5 tv/cmpt
6-4 computers 2
Shifts in Production Possibilities
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Production Possibilities Curve
0 3
1000
Computers
Ha
mb
urg
ers
With morecomputers, the curve shifts out
in the nextperiod.
To expand production possibilities curve – You need economic growth –but how?
Economic Resources
Basic items that are used in all types of production to meet the needs of wants of individuals and society as a whole◦ Natural Resource
◦ Capital Resource
◦ Human Resources
◦ Entrepreneurship
Specific strategies to increase economic resources
Increase resources by discovery of new oil and gas deposits (Natural resources)
Increase human resources through immigration and improving the skills of the existing workforce
Increase an economy’s capital stock –devote more resources into producing more efficient machines and technology.
Why?
Consider the opposite- what might this graph suggest? Would it make sense?
Hamburgers
Computers
Reason
Resources are not perfectly adaptable to all products
(The assumption also is that the two products are quite distinct)
Law of Increasing Opportunity Cost
Reason:
Specialized resources will not be as productive after transfer
Each machine/person is specialized in one area(Resources are specialized)
Thus, resources used are not perfectly substitutable between both goods produced
Law of Increasing Opportunity Cost
Result:
The result is smaller increase in computers as we transfer resources over
Each computer costs more than the previous one in terms of hamburgers
Law of Increasing Opportunity Cost
A more detailed explanation:◦ Human resources: At first, switching a few staff from one department to another isn’t difficult. However, as you switch more staff, they are taken away from what they are good at and receiving new training for the new job = more money = higher opportunity cost
◦ Capital resources: As production shifts more from one good to the next, even more equipment need to be replaced. Even more money is needed in this replacement process, adding to the opportunity cost
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