Chapter 1 The Economic Way of Thinking Section 3 Analyzing Production Possibilities

Analyzing Production Possibilities Section-3 Analyzing Production Possibilities Graphing the Possibilities KEY CONCEPTS Economic models — simplified representations of economic forces Production possibilities curve (PPC) is one model — maximum goods or services that can be produced from limited resources — also called production possibilities frontier

Graphing the Possibilities KEY CONCEPTS PPC based on assumptions that simplify economic interactions — resources are fixed — all resources are fully employed — only two things can be produced — technology is fixed

Graphing the Possibilities Production Possibilities Curve PPC runs between extremes of producing only one item or the other Data is plotted on a graph; lines joining points is PPC — shows maximum number of one item relative to other item PPC shows opportunity cost of each choice — more of one product means less of the other

What We Learn from PPCs KEY CONCEPTS Concepts revealed by PPC: — Efficiency — producing the maximum amount of goods and services possible — Underutilization — producing fewer goods and services than possible Example: Efficiency and Underutilization Each point on PPC represents efficiency — points inside curve mean underutilization; outside curve cannot be met Law of increasing opportunity costs — as production switches from one product to another, more resources needed to increase production of second product Example: Increasing Opportunity Costs Increase in opportunity cost — each new unit costs more than last one Reasons for increasing cost of making more of one product — need new resources, machines, factories — must retrain workers Costs paid by making less and less of other product Example: A Shift in the PPC A country’s supply of resources changes over time — Example: U.S. in 1800s grew, gained resources, workers, new technology — new resources mean new production possibilities beyond frontier Increased production shown on PPC as shift of curve outward Increase in total output called economic growth