Economic Fundamentals: Basic Concepts Production Possibility Curve SSEF6 Explain how productivity, economic growth, and future standards of living are influenced by investment in factories, machinery, new technology, and the health, education, and training of people. d. Analyze, by means of a production possibilities curve: trade-offs, opportunity cost, growth, and efficiency.

Economic Fundamentals: Basic Concepts Production Possibility Curve Opportunity costs for national/societal economic decisions are illustrated by the use of a PRODUCTION POSSIBILITIES CURVE (PPC).

Graph showing alternative ways to use the FoP available to an economy. It illustrates the OC/trade-offs required in the production of one G/S over another.

Origin is always zero Units are always equal Label X & Y axis GUNS 10 Origin is always zero Units are always equal Label X & Y axis 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

This nation can only produce guns (capital goods) or butter (consumer goods) It produces these by using the FoP available It can produce any combination of guns or butter All guns, no butter All butter, no guns Some guns, some butter 10 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

GUNS BUTTER 10 A 8 B 6 C 4 D 2 E 2 4 6 8 10 This is the PPC It represents ALL possible combinations of guns and butter this country can produce at one point in time A 8 B GUNS 6 C 4 D 2 E 2 4 6 8 10 BUTTER

10 It does not show past or future performance. For that, we have to add a new curve. To help us with that, let me introduce you to… 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

Increase right, decrease left IRDL the turtle If it is a DECREASE in production the curve moves to the LEFT If it is an INCREASE in production, then the curve moves to the RIGHT Increase right, decrease left

GUNS BUTTER 10 Increases indicate growth from… Growing population Technology Lower taxes Discovery of resources Winning a war 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

GUNS BUTTER 10 Decreases indicate contraction from… Diminishing population Higher taxes Losing a war Natural disaster 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

10 In some cases countries do not use their resources efficiently; this is called underutilization and represented by this point within the PPC. What a country cannot do is produce more than the resources it has available; this is called impossible and is represented by this point outside the PPC. 8 GUNS 6 4 2 2 4 6 8 10 BUTTER

Just a few more things… Historically, our PPC has constantly been shifting to the right Remember GDP growth? One of our biggest shifts to the right occurred following WWII Only one time in our history has the curve moved significantly to the left, meaning our economy produced less than before. Want to take a guess what this era was called?