1. Production Possibilities
Model showing all the combinations
Of two goods that can be produced
With the resources and technology
Currently available.

2. Production Possibilities
Line that looks at the choices any society faces with scare resources.
Shows the following ideas:
Scarcity
Efficiency
Trade-Offs
Opportunity Costs
Constant Opportunity Costs & Increasing Opportunity Costs
Economic Growth

3. Production Possibilities
Example:
The Pizza Shack can make two things:
Pizzas or Calzones
It takes 15 minutes to make pizza or 20 minutes to make a calzone

4. Production Possibilities
In an 8 hour day, how many pizzas can The Pizza Shack produce?
(It takes 15 minutes to make pizza or 20 minutes to make a calzone)
Answer: 32 pizzas
In an 8 hour day, how many calzones can The Pizza Shack produce?
Answer: 24 pizzas
Note: It is possible to produce either 32 pizzas or 24 calzones – or some combination in-between – but it is not possible to produce both 32 pizzas and 24 calzones.

5. Production Possibilities
Points on the line
show efficient production
(resources are being fully utilized)
Calzones
Points under the line
show inefficient production
(resources are NOT being fully utilized)
Points outside the line
show production that is
NOT currently possible 24 18
NOTE: The graph is an X and Y axis. Plan on things being mathematically accurate! 12 6
Pizzas 8 16 24 32

6. Production Possibilities
Imagine we are current producing
18 Calzones and 8 Pizzas (labeled point A)
Points on the line
show efficient production
(resources are being fully utilized)
Calzones
Question:
What does it “cost” the economy
to produce 8 more pizzas?
(what does it cost the economy to move from point A to point B)
Points under the line
show inefficient production
(resources are NOT being fully utilized)
Points outside the line
show production that is
NOT currently possible 24
Answer:
The cost – or opportunity cost – of producing 8 more pizzas is 6 calzones 18 A
Question:
What is the opportunity cost of moving from point B to point C? 12 B 6 C
Pizzas 8 16 24 32

7. Production Possibilities
Opportunity Cost
The highest valued foregone alternative
What you give up to get something
Does not have to mean money
What is the opportunity cost of coming to today’s class?

8. Production Possibilities
Question:
What is the opportunity cost of moving from point A to point B?
from point B to point C?
from point C to point D?
from point D to point E?
Calzones A
6 Calzones 24 B
6 Calzones 18 C
6 Calzones 12 D
6 Calzones 6 E
Pizzas 8 16 24 32
Constant Opportunity Costs

9. Production Possibilities
Question:
What is the opportunity cost of moving from point A to point B?
from point B to point C?
from point C to point D?
from point D to point E?
Robots
Opportunity Costs increase as production of one good increases.
1 Robots
2 Robots A
4 Robots
Why? B 18 17 C 15
Principle of the Lowest Hanging Fruit: Certain resources are better suited at producing certain goods or services. D
11 Robots 11 E
Pizzas 8 16 24 32
Increasing Opportunity Costs

10. Production Possibilities
Question:
How can the Economy grow?
Answer: Produce more stuff!
Robots
Growth is shown by the PPF shifting outward.
How?
Increase the factors of production or the level of technology.
Pizzas
Economic Growth

11. Production Possibilities – Famous Examples
Goods
Guns
Services
Butter
Consumption vs. Capital shows the trade-off between consumption vs. growth
Consumption Goods
Guns vs. Butter shows the trade-off between war-time goods and peace-time goods.
Capital Goods

12. Theory vs. Reality
Question: Efficient Production (producing on the line) is desirable – so why a society ever be under the line (inefficient)?
Theory Answer: Society may be under the line so long as one of the factors of production is under-utilized (if land, labor, capital or entrepreneurship is under-utilized).
Reality Answer: Society tends to be under than line when labor is under-utilized. Being under the line tends to represent unemployment or recessions.

13. Theory vs. Reality Question: How can be grow the economy?
Theory Answer: Increase any of the factors of production (increase the amounts of land, labor, capital and entrepreneurship)
Reality Answer: Society tends to grow the economy by increasing the amount of capital.
(Note: increasing the level of technology also grows the economy, but remember that for any given PPF, the level of technology is fixed. It is also worth mentioning capital can only boost growth so far. Sustained long-run growth can only be explained by increases in technology)

14. Resource Allocating Mechanisms
Question:
How does any society choose what amount of ‘guns and butter’ to produce? Should they produce at point A? Should they produce at point D?
Society must have a mechanism to determine this!
The options are as follows:
Brute Force
Tradition
Command or Centrally Planned
Markets
Guns A B C D E
Butter
Linked to these ideas are Capitalism and Socialism.
Capitalism and Socialism refer to the ownership of the resources.
With Capitalism, resources are privately owned.
With Socialism, resources are owned by the government.

15. Centrally Planned Capitalism
Resource Allocating Mechanisms
Economies can then be viewed as the following:
Resource Allocation
Market
Command
Market Capitalism
Centrally Planned Capitalism
Market Socialism
Centrally Planned Socialism
Sweden
Private
USA
Japan
Resource
Ownership
Hungary
Wartime
USA
Government
Yugoslavia
Soviet Russia
Most nations have market capitalist economies