Chapter 1 Section 3: Production Possibilities Curve

Production Possibilities Economists use graphs to analyze the choices & trade offs that people make to help us see how one value relates to another value Production possibilities curve shows alternative ways to use an economy’s productive resources

–The axes of the graph can show categories of goods & services, or any pair of specific goods or services Drawing a production possibilities curve –Start by deciding which goods & services to examine

Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) 0 a (0,15) b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) The production possibilities frontier is the line that shows the maximum possible output for that economy.

Trade offs Using the factors of production to make one product means that fewer resources are left to make something else

Efficiency, Growth, & Cost Graph shows us how efficient an economy is, whether an economy has grown or shrunk, & the opportunity cost of a decision to produce more of one good or service

Efficiency Production possibilities frontier represents an economy working at its most efficient level of production Def.–using resources in such a way as to maximize the output of goods & services

Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S Any point inside the line indicates an underutilization of resources

Growth Production possibilities curve the country’s current production possibilities as if the country’s resources were frozen in time –In real time, the quantity of resources is constantly changing- curve will move

When an economy grows, economists say that the entire production possibilities curve has “shifted to the right” When a country’s production capacity decreases, the curve shifts to the left –Ex: war, aging population

Shoes (millions of pairs) Watermelons (millions of tons) Production Possibilities Graph T Future production Possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) a (0,15) b (8,14) S If more resources become available, or if technology improves, an economy can increase its level of output & grow.

Cost Not necessarily money Def.- alternative we give up when we choose one option over another Opportunity cost

Law of increasing costs- as production switches from one item to another, more & more resources are necessary to increase production of the second item –Opportunity cost increases As we move along the curve, we trade off more & more to get less & less additional output

Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) c (14,12) d (18,9) To move from point c to point d on this graph has a cost of 3 million pairs of shoes.

Resources & Technology When economists collect data to create a production possibilities curve, they must first determine which goods & services a country can produce, given its current resources

Land, natural resources, work force, & physical & human capital Technology A country’s production possibilities depend on both its technological level & the resources it has available