The Production Possibilities Curve (PPC) Using Economic Models… Step 1: Explain concept in words Step 2: Use numbers as examples Step 3: Generate graphs from numbers Step 4: Make generalizations using graph

What is the Production Possibilities Curve? A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources Fixed Technology

Production “Possibilities” Table f 14 12 9 5 2 4 6 8 10 Bikes Computers Each point represents a specific combination of goods that can be produced given full employment of resources. NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

Production Possibilities How does the PPG graphically demonstrate scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2 Impossible/Unattainable (given current resources) A B G C Bikes Efficient D Inefficient/ Unemployment E 0 2 4 6 8 10 Computers

Production Possibility Curve Assume a country can produce two types of goods with its resources – Butter or Cotton Butter If it devotes all resources to butter it could produce a maximum of Ym. If it devotes all its resources to cotton it could produce a maximum of Xm Ym These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) Xm Cotton

Production Possibility Curve If the country is at point A on the PPG, it can produce the combination of Yo butter and Xo of cotton Production Possibility Curve Butter If the country is at point B on the PPG, it can produce the combination of Y1 butter and X1 of cotton Ym A Yo These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) B Y1 Xo X1 Xm Cotton

Production Possibility Curve If it reallocates its resources (moving round the PPG from A to B) it can produce more cotton but only at the expense of less butter. The opportunity cost of producing an extra Xo – X1 cotton is Yo – Y1 butter. Butter Ym A Yo These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) B Y1 Xo X1 Xm Cotton

.B Production Possibility Curve Production inside the PPF – e.g. point B means the country is not using all its resources It can only produce at points outside the PPG if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPG further outwards. Butter C Y1 A .B Yo The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and can be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C (in a simple context of course – there is always some form of sacrifice of using resources!). Xo X1 Cotton

Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computer 4.The opportunity cost of moving from f to c is… 0 Computers 5.What can you say about point G? Unattainable

The Production Possibilities Curve (or Frontier)

Production Possibilities A B C D E CALZONES 4 3 2 1 0 PIZZA 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Constant Opportunity Cost- Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Production Possibilities A B C D E PIZZA 20 19 16 10 0 ROBOTS 0 1 2 3 4 List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. Law of Increasing Opportunity Cost- As you produce more of any good, the opportunity cost (forgone production of another good) will increase. Why? Resources are NOT easily adaptable to producing both goods. Result is a bowed out (Concave) PPC

Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Wheat Pineapples

Shifting the Production Possibilities Curve

3 Shifters of the PPC Production Possibilities 4 Key Assumptions Revisited Only two goods can be produced Full employment of resources Fixed Resources (4 Factors) Fixed Technology What if there is a change? 3 Shifters of the PPC 1. Change in resource quantity or quality 2. Change in Technology 3. Change in Trade

Production Possibilities What happens if there is an increase in population? Robots Pizzas

Production Possibilities What happens if there is an increase in population? Robots Pizzas 17

Production Possibilities What if there is a technology improvement in pizza ovens Robots Pizzas 18

Production Possibilities What if there is a technology improvement in pizza ovens Robots Pizzas 19

PPC Practice Draw a PPC showing changes for each of the following: Pizza and Robots (3) 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. BP Oil Spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education

New robot making technology Question #1 New robot making technology Q A shift only for Robots Robots Q Pizzas 21

Question #2 Decrease in the demand for pizza Q The curve doesn’t shift! A change in demand doesn’t shift the curve Robots Q Pizzas 22

Mad cow disease kills 85% of cows A shift inward only for Pizza Question #3 Mad cow disease kills 85% of cows Q A shift inward only for Pizza Robots Q Pizzas 23

Question #4 BP Oil Spill in the Gulf Q Decrease in resources decrease production possibilities for both Capital Goods (Guns) Q Consumer Goods (Butter) 24

Question #5 Faster computer hardware Q Quality of a resource improves shifting the curve outward Capital Goods (Guns) Q Consumer Goods (Butter) 25

Question #6 Many workers unemployed Q The curve doesn’t shift! Unemployment is just a point inside the curve Capital Goods (Guns) Q Consumer Goods (Butter) 26

Question #7 Significant increases in education Q The quality of labor is improved. Curve shifts outward. Capital Goods (Guns) Q Consumer Goods (Butter) 27