PRODUCTION POSSIBILITY CURVE

WARM-UP 10/14

In your notebook answer the following:

What is scarcity?

Give me an example of scarcity.

What are the 4 Factors of Production?

Give an example of each.

PRODUCTION POSSIBILITIES CURVE

Vocabulary

1.Economic Model: simplified representation of economic forces.

2.Production Possibilities Curve (PPC): graph used by economists to show the impact of scarcity on an economy.

OBJECTIVES

•Be able to describe what a production possibility curve is and how it is constructed.

•Be able to explain what economists learn from using production possibility curves.

•Be able to analyze how production possibilities curves show economic growth.

GRAPHING THE POSSIBILITIES

•All economic choices involve trade-offs

•Economists have created economic models to clarify trade-offs

•Example: Production possibilities curve

PPC

•A graph used to show the impact of scarcity on an economy by showing the maximum number of goods or services that can be produced using limited resources.

PPC ASSUMPTIONS

•Based on assumptions that simplify the economic interactions:

1.Resources are fixed

2.All resources are fully employed

3.Only two things can be produced

4.Technology is fixed

HOW IS THE PPC USED?

•The curve on a PPC represents the border between what is possible to produce and what is not possible to produce.

•Useful for businesses, governments, and individuals

EXAMPLE

•Suppose you are preparing food for a soup kitchen and have the ingredients to make 12 loaves of bread or 100 bran muffins or some combination of the two.

•A PPC can help you decide what to make.

• (Interactive model)

WHAT WE LEARN FROM PPCS

•No economy actually operates according to the simplified assumptions underlying the PPC.

•Economists use it because it spotlights concepts that work in the real world of scarce resources.

•One important concept that is revealed is PPC efficiency.

NEW VOCABULARY

•Efficiency: involves producing the maximum amount of goods and services possible.

•Underutilization: means producing fewer goods and services than possible

EFFICIENCY & UNDERUTILIZATION

•“Guns” vs. “Butter”

•Guns is shorthand for military spending

•Butter is shorthand for consumer products

GUNS VS. BUTTER

•Regardless of the combination, each point represents efficiency, the most that can be produced with the available resources.

•Any point inside the curve represents underutilization, or the inefficient use of available resources.

SHAPE OF THE PPC

•The shape of the PPC shows a 3rd important economic concept – the law of increasing opportunity costs

•As production switches from one product to another, increasingly more resources are needed to increase the production of the second product