Production Possibilities Model showing all the combinations Of two goods that can be produced With the resources and technology Currently available.

Production Possibilities Line that looks at the choices any society faces with scare resources. Shows the following ideas: Scarcity Efficiency Trade-Offs Opportunity Costs Constant Opportunity Costs & Increasing Opportunity Costs Economic Growth

Production Possibilities Example: The Pizza Shack can make two things: Pizzas or Calzones It takes 15 minutes to make pizza or 20 minutes to make a calzone

Production Possibilities In an 8 hour day, how many pizzas can The Pizza Shack produce? (It takes 15 minutes to make pizza or 20 minutes to make a calzone) Answer: 32 pizzas In an 8 hour day, how many calzones can The Pizza Shack produce? Answer: 24 pizzas Note: It is possible to produce either 32 pizzas or 24 calzones – or some combination in-between – but it is not possible to produce both 32 pizzas and 24 calzones.

Production Possibilities Points on the line show efficient production (resources are being fully utilized) Calzones Points under the line show inefficient production (resources are NOT being fully utilized) Points outside the line show production that is NOT currently possible 24 18 NOTE: The graph is an X and Y axis. Plan on things being mathematically accurate! 12 6 Pizzas 8 16 24 32

Production Possibilities Imagine we are current producing 18 Calzones and 8 Pizzas (labeled point A) Points on the line show efficient production (resources are being fully utilized) Calzones Question: What does it “cost” the economy to produce 8 more pizzas? (what does it cost the economy to move from point A to point B) Points under the line show inefficient production (resources are NOT being fully utilized) Points outside the line show production that is NOT currently possible 24 Answer: The cost – or opportunity cost – of producing 8 more pizzas is 6 calzones 18 A Question: What is the opportunity cost of moving from point B to point C? 12 B 6 C Pizzas 8 16 24 32

Production Possibilities Opportunity Cost The highest valued foregone alternative What you give up to get something Does not have to mean money What is the opportunity cost of coming to today’s class?

Production Possibilities Question: What is the opportunity cost of moving from point A to point B? from point B to point C? from point C to point D? from point D to point E? Calzones A 6 Calzones 24 B 6 Calzones 18 C 6 Calzones 12 D 6 Calzones 6 E Pizzas 8 16 24 32 Constant Opportunity Costs

Production Possibilities Question: What is the opportunity cost of moving from point A to point B? from point B to point C? from point C to point D? from point D to point E? Robots Opportunity Costs increase as production of one good increases. 1 Robots 2 Robots A 4 Robots Why? B 18 17 C 15 Principle of the Lowest Hanging Fruit: Certain resources are better suited at producing certain goods or services. D 11 Robots 11 E Pizzas 8 16 24 32 Increasing Opportunity Costs

Production Possibilities Question: How can the Economy grow? Answer: Produce more stuff! Robots Growth is shown by the PPF shifting outward. How? Increase the factors of production or the level of technology. Pizzas Economic Growth

Production Possibilities – Famous Examples Goods Guns Services Butter Consumption vs. Capital shows the trade-off between consumption vs. growth Consumption Goods Guns vs. Butter shows the trade-off between war-time goods and peace-time goods. Capital Goods

Theory vs. Reality Question: Efficient Production (producing on the line) is desirable – so why a society ever be under the line (inefficient)? Theory Answer: Society may be under the line so long as one of the factors of production is under-utilized (if land, labor, capital or entrepreneurship is under-utilized). Reality Answer: Society tends to be under than line when labor is under-utilized. Being under the line tends to represent unemployment or recessions.

Theory vs. Reality Question: How can be grow the economy? Theory Answer: Increase any of the factors of production (increase the amounts of land, labor, capital and entrepreneurship) Reality Answer: Society tends to grow the economy by increasing the amount of capital. (Note: increasing the level of technology also grows the economy, but remember that for any given PPF, the level of technology is fixed. It is also worth mentioning capital can only boost growth so far. Sustained long-run growth can only be explained by increases in technology)

Resource Allocating Mechanisms Question: How does any society choose what amount of ‘guns and butter’ to produce? Should they produce at point A? Should they produce at point D? Society must have a mechanism to determine this! The options are as follows: Brute Force Tradition Command or Centrally Planned Markets Guns A B C D E Butter Linked to these ideas are Capitalism and Socialism. Capitalism and Socialism refer to the ownership of the resources. With Capitalism, resources are privately owned. With Socialism, resources are owned by the government.

Centrally Planned Capitalism Resource Allocating Mechanisms Economies can then be viewed as the following: Resource Allocation Market Command Market Capitalism Centrally Planned Capitalism Market Socialism Centrally Planned Socialism Sweden Private USA Japan Resource Ownership Hungary Wartime USA Government Yugoslavia Soviet Russia Most nations have market capitalist economies