Production Possibilities Curve Graphs to show alternative ways to use an economy ’ s productive resources

Production Possibilities  Economists will use graphs to analyze choices and trade-offs people make.  Why?  Graphs help us understand how one value relates to another value.  Graphs- logical representation of figures  Axes of graphs chart categories and facts

Drawing a Production Possibilities Curve  1. Must decide which goods or services to examine- Simple graph-Chart  2. Country of Capeland  Shoes vs Watermelons- figures 1.4  Vertical axis: shoes= 15 million  Horizontal axis: watermelons= 21 million  Opportunity cost thinking- smart???

Another Way- ” Production Possibilities Frontier ”  3 rd alternative- figure 1.5 ”  Benefit of this thinking? Diversify!!!!  Thinking on “ margin ” - multiple possibilities and trade-offs  Both shoes and watermelons  The line drawn on the line graph is a “ production possibilities frontier ”  OPTIONS about Capeland ’ s production

Efficiency, Growth & Cost  Graphs (Production possibilities) gives us a lot of information.  Efficiency, growth,opportunity costs of production of one good or another  Production Possibilities Frontier shows EFFICIENCY- maximizing output and use of resources in production.  Not all economies are efficient

Underutilization  Graph 1.5- any point inside of the graph represents underutilization of resources and production of goods. Fewer overall goods produced in economy.  Production of shoes and watermelon not at full potential

Growth  Production possibilities curve is a snapshot of of resources at a specific point in time  Real world- resources are “ fluid ” constantly flowing and changing  Quantitiy/Qualitiy of land, labor, resource  Growth = shift to right or increae “ T ”  Reasons???? See above LL&R  Decrease????????? “ G ”

Cost  Not necessarily monetary  Opportunity Cost- next best alternative  COST- one option vs another or sacrifice  COST figure 1.5  0 watermelons to 8 million tons = 1 million shoes (cost) ?? 8/1  2 nd step- 14/2?? Incease of only 6- result?

Law of increasing costs  As production switches from from one item to another, more and more resources are necessary to increase production of 2 nd item.  Switching from shoes to watermelons costs something  Shoes to watermelons show increasing costs  Expense of tradeoff-watermelon to shoes

Law of Increasing Costs  Figure 1.7  In the example- why does cost increase?  What are resources best suited for?  Do resources & technology impact production choices?  Resources, skill of workers, technology