1. S1M3: PPC (the production possibility curve)
And other economic models

2. First quick review
Economic systems – method used by society to determine production
2 extremes
Market economy
Command economy
2 non extremes
Mixed economy
Traditional

3. Market
Private individuals lead the way

4. Command
Gov makes the decisions

5. Mixed
Both Gov and Private parties

6. Traditional
Habit, custom, and ritual based

7. Economic Questions 1.What to produce 2. Who will produce it
3. Who will consume

8. Economic Models
Economist use models to simplify our world in order to improve our understanding.
- While we have many models the most basic are
The Circular Flow Diagram
The Production Possibilities Curve
The circular-flow diagram is a visual model of the economy that shows how dollars and resources flow through markets among households and firms.

10. Day 2 PPC

11. Trade-offs: The Production Possibilities Curve
Alexander Selkirk was a castaway on a deserted island off Chile in With limited resources, Selkirk essentially became a one-person economy.
Every day, he chose whether to fish, find coconuts, build shelter,
or look out for rescue ships.
These trade-offs meant an hour spent doing one was an hour that could not be spent doing another.

12. Trade OFF
You are in charge of putting armor on this plane to help it keep fighting Where would you put it?
- Keep in mind weight (the more armor the heavier the plane so fuel, cargo space and speed/maneuverability will be hurt.

13. Trade-offs: The Production Possibilities Curve
A trade-off occurs when you give up one thing to get something else.
The production possibilities curve (PPC) shows the trade-offs facing an economy that produces only two goods.
The PPC shows the maximum quantity of one good that can be produced for each possible quantity of the other.

14. Trade-offs: The Production Possibilities Curve
This PPC shows the trade-off between coconut and fish production.
Quantity
of coconuts
Production possibilities curve (PPC) 30
At point B, 28 fish and 9 coconuts are produced.
At point A, 20 fish and 15 coconuts are produced.
Feasible and productively efficient A 15
Every point along the PPC is both feasible and efficient.
Both A and B are efficient—all available resources are used. B 9 20 28 40
Quantity of fish

15. Trade-offs: The Production Possibilities Curve
Points to the left of the PPC are feasible but inefficient—not all resources are being used.
Points to the right of the PPC are not feasible. They exceed available resources.
Quantity
of coconuts D 30
Not feasible
At point D, 40 fish and 30 coconuts would be produced—but this production level is impossible.
At point C, 20 fish and 9 coconuts are produced. A 15 C B 9
Feasible, but
inefficient 20 40
Quantity of fish

16. Efficiency
An economy is efficient if there are no missed opportunities—meaning that there is no way to make some people better off without making other people worse off.
An economy achieves productive efficiency if it produces at a point on its production possibilities curve.
An economy achieves allocative efficiency if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

17. Efficiency
An economy is efficient if there are no missed opportunities—meaning that there is no way to make some people better off without making other people worse off.
A crowded classroom could be inefficient if switching to a larger classroom would make some students better off without making anyone worse off.

18. Efficiency
An economy has productive efficiency if it produces at a point on its production possibilities curve.
An economy has allocative efficiency if it produces at the point along its production possibilities curve that makes consumers as well off as possible.

19. Opportunity Cost
The PPC is a useful reminder that the true cost of anything is not just its price, but everything in addition to money that must be given up in order to get it—the opportunity cost.
On a deserted island where each fish caught means a certain number of coconuts cannot be harvested, the opportunity cost of each fish is measured in coconuts given up.

20. Opportunity Cost
This PPC shows the increasing opportunity cost of producing fish in terms of coconuts lost.
Quantity
of coconuts
Producing the first
20 fish . . .
…requires giving up only 5 coconuts 35
But producing
20 more fish . . . 30 A 25 20
The concave or bowed-out shape of the PPC reflects an increasing opportunity cost.
…requires giving up
25 coconuts. 15 10 5
PPC 10 20 30 40 50
Quantity of fish

21. Economic Growth
Economic growth is a sustained rise in aggregate output and an increase in a standard of living.
Economic growth can also be understood as an expansion of an economy’s production possibilities.

22. Economic Growth
After growth, the PPC moves to point E (25 fish and 30 coconuts). 10 20 25 30 40 50 35 15 5
Quantity
of coconuts
Quantity of fish
Production initially lies at A
(20 fish and 25 coconuts). E
The old PPC shifts outward to a new PPC because production possibilities have expanded. A
New PPC
The economy can now produce more of everything.
Original PPC

23. Economic Growth
The two main sources of growth are increases in available resources and improvements in technology.
For example, a person stranded on a deserted island might suddenly discover a new coconut grove full of low-hanging coconuts. This increase in available resources (also knows as factors of production) would shift the PPC outward.

24. Economic Growth
Technology is the technical means for producing goods and services.
For example, a person stranded on a deserted island might discover or build a fishing net. This improvement in technology would shift the PPC outward.

26. Summary and Review 1) What is a trade-off?
Something you give up in exchange for something else.
2) What does the production possibilities curve illustrate?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
The trade-offs facing an economy that produces only two goods.

27. Summary and Review
3) Points to the left of the PPC are feasible but _______
inefficient; some resources are left unused.
4) Points to the right of the PPC are _______
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
not feasible; the economy cannot produce this much.

28. Summary and Review 5) Points along the PPC are both _______
efficient and feasible.
6) If an economy grows, its PPC shifts in which direction?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
To the right.

29. Summary and Review 7) What are the two main causes of economic growth?
Increased availability of resources (or factors of production) and improvements in technology.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.

30. Walkthrough: Free-Response Question 1
1. Refer to the graph. Assume that the country is producing at point C. a. Does this country’s production possibilities curve exhibit increasing opportunity costs? Explain. b. Suppose point C is initially the allocatively efficient point for this country, but then the country goes to war. Before any of the country’s resources are lost in the fighting, which point is the most likely to be allocatively efficient for the country when it is at war? Explain. c. If the economy entered into a recession, the country would move from point C to which point? Explain. (3 points)
1 point: Yes
1 point: A recession, which causes unemployment, is represented by a point below the PPC.
1 point: The PPC is concave (bowed outward), so with each additional unit of butter produced, the opportunity cost in terms of gun production (indicated by the slope of the line) increases. Likewise, as more guns are produced, the opportunity cost in terms of butter increases.
1 point: E
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
1 point: The country would choose an efficient point with more (but not all) military goods with which to fight the war. Point A would be an unlikely choice because at that point there is no production of any social goods, some of which are needed to maintain a minimal standard of living.
1 point: B