A simple Demonstration Production Possibilities

Scarcity We come to this world with many needs and desires while facing limited resources. We cannot have all we want! Given our limited resources, we have to make choices. Every time make a choice in favor of one option we forego one or more other options: Opportunity costs

Production Possibilities of an Economy: A simple Demonstration A production possibilities curve or frontier (or schedule) is a line drawn in a two-dimensional space (or a table) showing all the possible combinations of two goods that an economy can produce using all its available resources fully and in the most efficient way it can.

Constructing a production possibilities curve: Assumptions: The economy produces only two goods (or services) Given resources Given technology Full employment Full production

Robots (K) Pizza(C) 0 A B (1) (2) (3)

Figure 3: Technical Inefficiency

The Effect War of the Economy In wars resources are taken away from the production of consumer and capital goods and are reallocated to the production of military goods and services. How does this reallocation of the economic resources affect the economy now and in the future? Can a war be economically justified?

Figure 4 Civilian Goods Military Goods o A B

Figure 5 Military Goods Consumer Goods Large Economy Small Economy