PRODUCTION POSSIBILITIES CURVES CH. 1.3

I. PRODUCTION POSSIBILITIES A. Production Possibilities Curve, or graph: a graph that shows alternative ways to use an economy’s resources Axes on graphs show g+s

I. PRODUCTION POSSIBILITIES B. Drawing a P.P. Curve 1. Pick the g+s to examine EXAMPLE: a gov’t chooses to examine the production of watermelons and shoes 2. Figure out 2 extreme options EXAMPLE: no shoes, all watermelons ~OR~ all shoes, no watermelons

I. PRODUCTION POSSIBILITIES B. Drawing a P.P. Curve (cont.) 3. Use data to figure out other alternatives where both can be produced Production Possibilities Frontier: the line on the P.P. Curve that shows the maximum possible outputs EXAMPLE: this shows when all resources are being used to produce a max. combination of the 2 products (watermelons and shoes) Each point on the P.P. Frontier represents a trade-off

I. PRODUCTION POSSIBILITIES This shows step 3

II. EFFICIENCY, GROWTH, & COST A. Efficiency: using resources in such a way as to maximize the production or output of g+s

II. EFFICIENCY, GROWTH, & COST A. Efficiency Sometimes economies are inefficient When this happens, a point is made inside the P.P.Frontier Underutilization: using fewer resources than the economy is capable of using

II. EFFICIENCY, GROWTH, & COST B. Growth Realistically, the P.P.Frontier is going to constantly be changing When an economy grows, the line will “Shift to the Right” When an economy decreases in production capacity, the line will “Shift to the Left”

II. EFFICIENCY, GROWTH, & COST C. Cost: the alternative we give up when we choose one option over the other (just like O.C.) BASICALLY…we have to sacrifice something for another

II. EFFICIENCY, GROWTH, & COST C. Cost Law of increasing costs: as production shifts from 1 item to another, more & more resources are necessary to increase production of the 2nd item BASICALLY…if you make more watermelons, you must have more stuff (land, labor, capital, and entrepreneurs) to make them This is why the P.P.Frontier curves and is NOT a straight line

Where is the map

Brazil – missionary housing

Brazil - slums

The facts before us Economies are defined by scarcity. Scarcity forces people to make choices Choices involve costs Since we all face different costs, by specialization and trading we can create wealth Markets form to facilitate trade

THE GRAND SYNTHESIS – Comparative Advantage and the Tale of Robinson Crusoe