Chapter 1 section 3: Production possibilities curve Name: __________________

Production possibilities Production possibilities curve: a graph that shows alternative ways to use an economy’s resources Axis: shows categories of goods and services (farm goods, factory goods) – Can also display any pair of specific goods or services (hats and shoes)

Drawing a curve Begin by deciding which goods or services to examine…lets go with farm goods and factory goods (shoes and watermelon) Therefore shoes and watermelons become the values shown on the graph – 0 watermelons, all shoes…0 shoes, all watermelons

One more choice It isn't always all or nothing…there are other choices What if we wanted to make watermelons and shoes? If you plot those points…you have just drawn a production possibilities frontier-its shows the maximum combination for those two products

Production possibilities curve

Trade-offs Each point on the curve reflects a trade-off Examples: the top has more shoes, but fewer watermelons – The bottom has more watermelons, but fewer shoes Why? Land, labor, capital are scare More of one thing means less of another

What can a graph show us? How efficient the economy is Whether the economy has grown or shrunk Opportunity cost of a decision to produce more of one good or service

Efficiency The production possibilities frontier represents an economy working at its most efficient level of production Efficiency: using resources in such a way as to maximize the production or output of goods and services Sometimes things happen (workers laid off, bad conditions) – At any point inside the curve=underutilization Underutilization means using fewer resources than the economy is capable of using

Growth The curve represents as if it were frozen in time, although the country and resources are constantly changing – People, land, technology When an economy grows, economists say the entire production possibilities curve has “shifted to the right” When an economy shrinks, they say shifted to the left – Go to war and lose land, population ages, becomes less healthy (labor and human capital) would decrease

Cost Cost: the alternative we give up when we choose one option over another – ie opportunity cost When you go from no watermelons to 8 million tons of watermelons, what is the cost? What about 20 watermelons? – Switching from shoes to watermelons cost something…increasing costs Each time we grow more watermelons, the sacrifice in terms of shoes increases Shows the it costs an additional 5 million pairs of shoes to increase watermelon production by only 1 million tons

Law of increasing costs – As production switches from one item to another, more and more resources are necessary to increase production of the second item *Opportunity cost increases – Why? » Because some resources are better suited for use in farming, while others are more appropriate for manufacturing. Moving resources from factory to farm production means that farmers must use resources that are not as suitable for farming. – As we move along the curve, we trade more and more to get less and less additional output

Resources and technology When economists collect data to create production possibility curves, they first determine which goods and services a country can produce, given its current resources. – Land and natural resources, work force, physical and human capital (technology)