1. Production Possibilities and Growth
Lesson 1.7

2. Question
How can an economy increase its productivity and grow beyond its current output?

3. Chores/Homework
Have you come up with ways to do homework or chores more efficiently?

4. Chores/Homework
Can you think of technology or tools that have helped you to accomplish (or produce) more in a given period of time?

5. Hmm…How have things changed?
What has allowed the United States to become more productive since the time when your grandparents were young?

6. WWII Production
U.S. converted the nation’s factories from producing consumer goods, such as cars and clothing, to making tanks, guns, and other goods necessary for the war effort.
What should a country produce???

7. Opportunity Costs
What are the trade-offs between “guns” or “machinery” (capital goods) and “butter” (consumer goods)?
LIMITED RESOURCES = MAKING CHOICES ON WHAT TO PRODUCE.
More TANKS = less CARS

8. Production Possibilities Frontier
Economists, governmental officials, businesses, and individuals continually strive to increase productivity and efficiency because an economy has limited resources which can be combined in various ways to produce a variety of goods and services.
Deciding what to produce requires choices and involves opportunity costs and tradeoffs for nations, individuals, and businesses.
Economists use a simple model to describe an economy’s possible production, current production, and potential production called the Production Possibilities Frontier or Production Possibilities Curve.
The model shows the possible combinations of the 2 types of goods that can be produced when available resources are employed fully and efficiently

9. Assumptions of a PPF
Production possibilities tables and curves are used to illustrate the economizing problem of scarcity. The curve and points on the line assume:
Nation/business is operating efficiently (full employment and full production).
Resources are fixed in quantity and quality.
Technology is constant during analysis.
Nation/business is producing only TWO types of products (ex/ farm products and manufactured goods).
It is possible to produce a combination of these two goods.

10. Resources available: Your business has 6 pieces of paper to produce either paper airplanes or paper footballs. What are your production possibilities?
Sheets of Paper
Airplanes
Footballs 6 5 1 4 2 3

11. Deriving a PPF 6 5 4 3 2 1 Footballs Steps:
Airplanes
Steps:
1. Place each good on an axis
2. Use the schedule to plot the points
3. CONNECT THE DOTS to form a curve

12. Deriving a PPF 6 5 4 3 2 1 Footballs Steps:
1. Place each good on an axis
2. Use the schedule to plot the points
3. CONNECT THE DOTS to form a curve 6 5 4 3 2 1
Airplanes

13. Deriving a PPF 6 5 4 3 2 1 Footballs Steps:
Airplanes
Steps:
1. Place each good on an axis
2. Use the schedule to plot the points
3. CONNECT THE DOTS to form a curve

14. Production Possibilities Frontier
Footballs 6 5 4 3 2 1
Efficiency: producing the maximum possible output from available resources
The curve (the line) represents what is attainable and efficient
The points along the line represent maximum possible combinations of the two goods without new technology or growth
Note: Optimal or best product-mix will be some point on the curve, but the exact point depends on society; this is a normative decision.
Airplanes

15. Inefficient or Unattainable
Footballs 6 5 4 3 2 1
Airplanes
I represents inefficient use of resources, but are attainable
Points inside the curve represent underemployment or unemployment of resource available to the society at that time
U represents unattainable combinations
Points outside the curve cannot be attained, the nation/business does not have the available resources to produce at that level. U I

16. Opportunity Cost and the PPF
Movement along line:
The shape of PPF shows opportunity costs of producing more of one type of good over the other.

17. Straight or Bowed?
The PPF will be straight if the economy has resources that are perfectly adaptable to producing both goods
The PPF will be bowed out when resources in the economy are not all perfectly adaptable to the production of both types of goods