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

2. 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

3. 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

4. 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

5. 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