Production Possibilities Curve (Frontier)

Graphing the Combinations of Production for Two Goods or

Services

Shows all of the possible combinations of two goods or services that can be produced within a stated time period, given two very important assumptions:

• All the natural, human, and capital resources are being used in the most efficient manner possible

• The amount of available resources & technology will not change during the period being studied

Opportunity Cost

The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative.

Production possibilities analysis assumes that:

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25%

1 2 3 4

1. resources and technology increase with production.

2. resources are used to produce thousands of goods.

3. extra resources are saved for emergency use.

4. resources are used in a technically efficient way.

Productuion Possibilities Curve

02468

1 2 3 4 5 6

Production of Luxury Cars (in millions)

Prod

uctio

n of

Ec

onom

y C

ars

(in

mill

ions

) ProductuionPossibilitiesCurve

Camry 6.5 5.5 4.5 3 0

Lexus LS 1 2 3 4 5

Therefore, all the combinations on the curve meet these assumptions

• Combinations that lie inside (below) the curve represent an inefficient use of resources

• Combinations that lie outside (above) the curve represent production impossibilities, giving existing technologies

Productuion Possibilities Curve

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1 2 3 4 5 6

Production of Luxury Cars (in millions)

Prod

uctio

n of

Ec

onom

y C

ars

(in

mill

ions

) ProductuionPossibilitiesCurve

Camry 6.5 5.5 4.5 3 0

Lexus LS 1 2 3 4 5

Unattainable

Inefficient

What is the opportunity Cost of producing 3 million luxury cars?

1 2 3 4

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1. 3 million Economy2. 4.5 million Economy3. 5.5 million Economy4. 0 Economy

Productuion Possibilities Curve

02468

1 2 3 4 5 6

Production of Luxury Cars (in millions)

Pro

du

cti

on

of

Ec

on

om

y C

ars

(in

m

illio

ns

)

ProductuionPossibilitiesCurve

In the Real world, technology and the factors of production do not remain constant

• When improvements in technology occur or new resources become available, the entire production possibilities curve changes

• A new curve is formed to the right/left of the original curve.

• This curve has “SHIFTED.”

Production Possibilities Curve

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10

1 2 3 4 5 6

Prod. of Luxury Cars (in millions)

Pro

d. o

f E

co

no

my

Ca

rs (

in m

illio

ns

)Series1

Series2

What happens to the Production Possibilities curve when new technologies are introduced into production?

Production Possiblities Curve

0

2

4

6

8

1 2 3 4 5

Prod. of Luxury Cars (in million)

Pro

d. o

f E

co

no

my

Ca

rs (

in m

illio

ns

)

Series1

Series2

What will happen to the Production Possibilities Curve if there is a decrease in the amount of resources available?

Any combination of products inside the production possibility frontier is:

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1 2 3 4

1. Allocatively inefficient

2. Tech inefficient 3. Consumer

inefficient 4. Productively

inefficient

My neighbor keeps his dog tied at the corner of his yard where his house meets a fence. The dog is on a 50-foot leash and therefore can run anywhere within the region defined by the leash, the fence and the house.

An economy may operate outside the Production Possibility Frontier if:

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1. It is not utilizing its resources fully

2. It is being productively efficient

3. It is a mixed economy 4. It is trading with

other economies

An outward shift of the production possibility frontier may be caused by:

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1 2 3 4

1. An increase in demand

2. More government spending

3. Better training of employees

4. Productive inefficiency

"Reality" is what we take to be true. What we take to be true is what we believe. What we believe is based upon our perceptions. What we perceive depends on what we look for. What we look for depends upon what we think. What we think depends upon what we perceive. What we perceive determines what we believe. What we believe determines what we take to be true. What we take to be true is our reality.

Gary Zukav, The Dancing Wu Li Masters: An Overview of the New Physics (New York: Bantam Books, 1980), p. 310

Positive and Normative Statements

Positive Economic Statement – A statement that can be proved or disproved by reference to facts

Ex. : The U.S. unemployment rate is 5.1%

Normative Economic Statement – A statement that represents an opinion, which cannot be proven or disproved

Ex. : The U.S. unemployment rate should be lower

"The Consumer Price Index increased by 4.2 percent in the first quarter of this year." What type of statement is this?

1 2

50%50%1. Positive2. Normative

Which of the following is a normative statement?

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1. the Philadelphia Phillies have won 70 baseball games this year

2. the Consumer Price Index rose three-tenths of one percent in May

3. in January, the average temperature in San Diego exceeds the average temperature in Minneapolis

4. The New York Yankees need a better manager

Which of the following is a positive statement?

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1. driving speeds should be lowered so that fewer accidents will occur

2. when per capita income falls, fewer meals are consumed at restaurants

3. the minimum wage is too low; college students deserve a raise

4. cigarette sales should be made illegal in order to reduce the incidence of cancer

"Senior citizens deserve an income that will allow them to live in comfort for their remaining years." This is

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1. neither a normative nor a positive statement

2. both a positive and a normative statement

3. a positive statement4. a normative statement

Review: Determine whether the following statements are positive or normative statements.

•In a survey of 464 economists, only 6.5% disagreed with the statement “A ceiling on rents reduces the quantity and quality of housing available.”

_____________________

Review: Determine whether the following statements are positive or normative statements.

•“The distribution of income in the U.S. should be more equal.”

_____________________

Year One Year Two

"How do we evolve from year one to year two?"

Federal Government Budget