Production Possibility Curve Applying Theories of Economic Choice to Maximize the Welfare of a Nation and its Citizens

Fundamental Problem Scarcity Scarcity –Wants will always exceed available resources. –Therefore must make production choices.

The Curve ‘Provides a visual of the production choices faced by people in a simple economy.’

Assumptions of the Curve 1. Only two products can be produced by this simple economy. Trade-offTrade-off Consumer vs. Capital GoodsConsumer vs. Capital Goods 2. The economy has fixed technology and resources. 3. The economy is at full employment.

Law of Increasing Relative Cost The opportunity to get greater amounts of one product, sacrifices an ever- increasing amount of other products.

Production Possibilities (alternatives ) Assembly Line Machine iPods Opportunity Cost of Additional Computer Production (quantity of iPods that must be given up) Relative Cost to Society A Computer = iPods B Computer = iPods C Computer = iPods D Computer = iPods E Computer = iPods F50

Production Possibility Curve iPods Assembly Line Machine If the opportunity cost of each computer were constant at 1000, then the line would be straight. Therefore, the curve is represented by a ‘bowed- out’, or concave line.

Why Concave? As production moves from iPods to Assembly Line Machines, the labour has to be transferred. As production moves from iPods to Assembly Line Machines, the labour has to be transferred. Therefore, people who are more suited to producing iPods are now producing large, more complicated assembly line machines. Therefore, people who are more suited to producing iPods are now producing large, more complicated assembly line machines.

Why Concave? cont. Those who are less suited to these machines are transferred first, followed by those who are more skilled. As the transfer of these workers occur, less, and less iPods may be made. Those who are less suited to these machines are transferred first, followed by those who are more skilled. As the transfer of these workers occur, less, and less iPods may be made. Therefore, a much larger amount of iPods must be sacrificed in order to produce the last 2 assembly line machines. Therefore, a much larger amount of iPods must be sacrificed in order to produce the last 2 assembly line machines.

Frontier The curve illustrates the ‘Maximum Potential’ Output that can be produced for each of the two products. The curve illustrates the ‘Maximum Potential’ Output that can be produced for each of the two products. Therefore, the curve is the outer limit or Frontier, of production possibility. Therefore, the curve is the outer limit or Frontier, of production possibility. Only attainable if all productive resources are fully employed. Only attainable if all productive resources are fully employed. Are resources always fully employed? Are resources always fully employed?

iPods Assembly Line Machine Point A illustrates most economies – operating inefficiently. Point M illustrates an unattainable point at this time. But may be attained through changes. A M Production Possibility Curve

Law of Increasing Diminishing Returns The relationship between an input (labour) and the resulting output. The relationship between an input (labour) and the resulting output. Outputs will increase when a particular input is increased, but only to a point. Outputs will increase when a particular input is increased, but only to a point. When point has been reached, increasing inputs will not have an effect on the production of outputs. When point has been reached, increasing inputs will not have an effect on the production of outputs.

YearFactoriesLabour Total Production (iPods) Increase in Yieldage

Law of Increasing Returns to Scale Illustrates what happens when all productive resources are increased simulataneously Illustrates what happens when all productive resources are increased simulataneously Using our example: Using our example:

YearFactoriesLabour Total Production (iPods) Increase in Yieldage

Why has this happened? Why has this happened? –Owner has increased all productive resources at the same time and in the same quantity. –They have increased their SCALE of operations. –The net result is a conversion to a larger scale of operations and a steady increase in the rate of extra output. –Increased returns to scale is termed – ECONOMIES OF SCALE Law of Increasing Returns to Scale