Production Possibilities Curve

Graphs to show alternative ways to use an economy’s productive resources

Production PossibilitiesEconomists will use graphs to analyze

choices and trade-offs people make.Why? Graphs help us understand how one

value relates to another value.Graphs- logical representation of figuresAxes of graphs chart categories and

facts

Drawing a Production Possibilities Curve1. Must decide which goods or services

to examine- Simple graph-Chart2. Country of CapelandShoes vs Watermelons- figures 1.4Vertical axis: shoes= 15 millionHorizontal axis: watermelons= 21

millionOpportunity cost thinking- smart???

Another Way-”Production Possibilities Frontier”3rd alternative- figure 1.5” Benefit of this thinking? Diversify!!!!Thinking on “margin”- multiple

possibilities and trade-offsBoth shoes and watermelonsThe line drawn on the line graph is a

“production possibilities frontier”OPTIONS about Capeland’s production

Efficiency, Growth & CostGraphs (Production possibilities) gives

us a lot of information.Efficiency, growth,opportunity costs of

production of one good or anotherProduction Possibilities Frontier shows

EFFICIENCY- maximizing output and use of resources in production.

Not all economies are efficient

UnderutilizationGraph 1.5- any point inside of the graph

represents underutilization of resources and production of goods. Fewer overall goods produced in economy.

Production of shoes and watermelon not at full potential

Growth Production possibilities curve is a snapshot of

of resources at a specific point in time Real world- resources are “fluid” constantly

flowing and changing Quantitiy/Qualitiy of land, labor, resource Growth = shift to right or increae “T” Reasons???? See above LL&R Decrease????????? “G”

Cost Not necessarily monetary Opportunity Cost- next best alternative COST- one option vs another or sacrifice COST figure 1.5 0 watermelons to 8 million tons = 1 million

shoes (cost) ?? 8/1 2nd step- 14/2?? Incease of only 6- result?

Law of increasing costs As production switches from from one item to

another , more and more resources are necessary to increase production of 2nd item.

Switching from shoes to watermelons costs something

Shoes to watermelons show increasing costs Expense of tradeoff-watermelon to shoes

Law of Increasing CostsFigure 1.7 In the example- why does cost

increase?What are resources best suited for?Do resources & technology impact

production choices?Resources, skill of workers, technology