Choice and Production Possibilities Societal economizing problems

Society’s Economizing Problem Society has limited resources. Society must decide how to allocate resources to produce goods and services. There are four basic categories of resources in society(known as factors of production) Land—natural resources Labor—physical and mental talents of individuals Capital—facilities, tools, machines, aids, etc. used in the production of consumer goods and services; money is not considered capital, but is used to invest in capital Entrepreneurial Ability—a human resource; entrepreneurs design and implement ways in which to allocate resources

Production Possibilities The production possibilities model is a way of demonstrating the allocative efficiency of a firm or society Such models assume full employment of available resources, a known fixed quantity and quality of the factors of production, a known fixed state of technology, and only two goods or services The overarching idea is that in producing one good or service society chooses to forego a different good or service (because the resources can only be used once) Production possibilities models can be shown in tables, but are more commonly shown in graph form (commonly called PPCs or PPFs)

Production Possibilities Curves Each axis represents a good or service that can be produced The line of the curve is represents the constraints of the factors of production Points inside the curve are attainable, but represent the inefficient allocation of available factors of production Points on the curve represent the perfect allocation of available factors of production Points outside the curve represent future possibilities given a change in the available factors of production

Law of Increasing Opportunity Cost OC = (Value Lost)/(Value Gained) or (Quantity Lost)/(Quantity Gained) The curve’s shape demonstrates the law of increasing opportunity cost The graph is curved because resources are not perfectly adaptable to alternative uses, thus the more resources that are redirected the greater the opportunity cost per additional unit Perfect interchangeability of the factors of production would result in a straight line on the graph

Actual Output Although PPC generally represent production possibilities, the line of the curve itself is also sometimes known as the Production Possibilities Frontier (PPF) because it represents the point at which efficient output and allocation of resources are maximized. Most economies do not actually exist on the PPF, but instead run at some point inside the PPC due to a variety of factors One of the most common factors leading to economies that are not producing at the PPF is unemployment (or more accurately: underemployment in the labor force)

Shifting PPCs Societies’ production possibilities are rarely stagnant. Production possibilities curves represent current potential allocation, but if the quantities of input resources (factors of production) change, the quality of input resources changes, and/or technology changes, then the PPC will shift left or right. A shift left represents a shrinking potential output; a shift right represents a growing potential output. One of the major goals of most governments is to regulate the economy to promote continual growth (because such growth usually means that the same workforce is getting more of the goods and services it previously had to choose between).

Future Possibilities & Trade Economic growth can result from any improvement or increase in the available resources (factors of production). One of the key factors in economic growth (and expanding production possibilities) is investment in new technologies and capital goods, this is usually done with an eye to the future with a decrease in goods or services available in the present. By investing in technology and increasing production while the labor force remains stable, a society increases the per capita goods and services produced Another way in which societies grow is through international trade—this frees up resources for the production of other goods and services.

Production Possibilities Practice Workbook: Unit 1 Lesson 2 Activity 2 Work with your neighbors to complete the activity Choice and Production Class Activity Failed CerealsFlavor Graveyard

Failed Cereals: A study in production & choice As you eat your cereal, watch the old commercials for cereals that are no longer available then read the article about breakfast cereals that failed and answer the questions: Freakies Pac Man Bill and Ted’s Mr. T Cereal

Ben & Jerry’s Flavor Graveyard Choose your preferred flavor of Ben & Jerry’s; as you savor its ice-creamy goodness read the hand out describing Ben & Jerry’s business, answer the questions, and check out the links below: parted_flavors.cfm