Production Possibilities Curve

Economic Growth and Production

The greatest powerpoint about production possibilities ever.

We are in a mixed market

economy• Therefore, we have to make choices

• We must choose how to spend our time, energy, and capital

• We must make a choice on what to study, what to eat, when to work

▫ Economics or Calculus

▫ Expensive Food or Cheap Food

▫ Friday night party or Friday night working

Scarcity, Choice,

and Opportunity Cost• Opportunity Cost

▫ The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

Scarcity, Choice,

and Opportunity Cost (cont'd)• Questions

▫ What is the opportunity cost of attending this economics class?

▫ What is the opportunity cost of attending a concert by your favorite band?

▫ What is the opportunity cost of increasing research for an AIDS vaccine?

Scarcity, Choice,

and Opportunity Cost (cont'd)• In economics, cost is always

a forgone opportunity.

Limited Resources & Unlimited Wants

Scarcity

Choices

Opportunity Cost

Scarcity, Choice,

and Opportunity Cost (cont'd)

Scarcity, Choice, and Opportunity Cost

• Opportunity cost and a national monument▫ Allocating land between public and

private use▫ The trade-off between the use of

land for recreation or for coal

• Question▫ What does the market value of coal

under the National Monument tell us about the perceived social value of the monument?

How to represent opportunity cost?• The production

possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced.

PPC - Studying

The Choices Society Faces (cont'd)

• Production possibilities assumptions

▫ Resources are fully employed

▫ Production takes place over a specific time period

▫ Resources are fixed for the time period

▫ Technology does not change over thetime period

The Choices Society Faces (cont'd)

• Efficiency

▫ A point along the line when everyone is employed and all resources are used correctly.

Production

Possibilities Curve (PPC)• What would happen to the production

possibilities curve if you spent more time studying?

▫ Let’s say instead of 12, you had 20 hours to study

• What would happen to your potential grades?

• What if the subjects overlapped like English and History or Speech

Economic Growth and the Production

Possibilities Curve• Economic growth

▫ Increases the production possibilities of the two goods

▫ Occurs over the long run

▫ Is illustrated by an outward shift of the production possibilities curve

Figure 2-4 Economic Growth Allows

for More of Everything

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All rights reserved.

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Economic Growth

• When the curve moves out we have economic growth, which is caused by:

▫ New Technology

▫ More Labor

▫ More Supply – a new supply of gasoline found

Copyright © 2008 Pearson Addison Wesley.

All rights reserved.

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The Choices Society Faces

• PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs

▫ At the individual level

▫ At the societal level

Guns vs. Butter

Guns vs. Butter• Minister of Propaganda Joseph Goebbels stated:

"We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." Sometime in the summer of the same year, Herman Göringannounced in a speech, "Guns will make us powerful; butter will only make us fat."

• Another use of the term was Margaret Thatcher's reference in a speech that, "The Soviets put guns over butter, but we put almost everything over guns."

The Trade-Off Between

the Present and the Future• PPC

▫ Can be used to illustrate the trade-off between present and future consumption

• Consumption

▫ The use of goods and services for personal satisfaction

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Figure 2-5

Capital Goods and Growth• Consumer goods

▫ Goods produced for personal satisfaction

• Capital goods

▫ Goods used to produce other goods

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We can move along the PPC, or have

the PPC move out

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Specialization and

Greater Productivity • Specialization

▫ Organization of economic activity among different individuals and regions

▫ Leads to greater productivity

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The Choices Society Faces (cont'd)

• In general, the more specialized the resources, the more bowed the PPC

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Specialization and

Greater Productivity (cont'd)• Absolute Advantage

▫ The ability to produce more units of a good or service using a given quantity of labor or resource inputs

▫ Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs

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Specialization and

Greater Productivity (cont'd)• Comparative Advantage

▫ The ability to produce a good or service at a lower opportunity cost

▫ Is always a relative concept

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Consider Michael Jordan and some

random minor league player• MJ has absolute advantage in basketball, and

maybe baseball, but the minor league player has a comparative advantage in baseball

• Country A has an absolute advantage in the production of both maize and wheat. At all points its production possibility curve lies to the right of that of Country B.

• Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of maize have been foregone. When Country B produces one more unit of wheat only half a unit of maize is foregone. Fewer resources are foregone if Country B specializes in the production of wheat.

• In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be traded.

Comparative Advantage

and Trade Among Nations (cont'd)• When nations specialize where they have a

comparative advantage and then trade with the rest of the world

▫ Economic efficiency improves

▫ Output increases

▫ Average standard of living rises

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Division of Labor• Rational individuals choose

their comparative advantage and specialize.

• Specialization leads to division of labor.

• Theorized by Adam Smith in Wealth of Nations

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Division of Labor (cont'd)

• Division of Labor

▫ Assigning different workers different tasks to produce a good or service

▫ Organizing a division of labor within a firm to increase output

• Examples

▫ Automobile production

▫ Hospital operating room

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