1. Ch 1.3: Production Possibilities Curve
Chapter Essential Question
How can we make the best economic choices?

2. Objectives Interpret a production possibilities curve.
Explain how production possibilities curves show efficiency, growth, and cost.
Explain how a country’s production possibilities are impacted by technology/training/education.

3. Production Possibilities
Economists often use graphs to analyze the choices and trade-offs that people make.
A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources.
To graph the curve, we must decide which goods or services are the alternatives

4. Production Possibilities Curve
Table shows 6 combinations of watermelons and shoes that could be produced if we used all of our factors of production
Answers: 18 million

5. Production Possibilities Frontier
The line on a production possibilities curve that shows the maximum possible output an economy can produce is called the production possibilities frontier.
Each point on the production possibilities frontier reflects a trade-off (watermelons vs. shoes).
These trade-offs are necessary because factors of production are scarce.
Using land, labor, and capital to make one product means that fewer resources are left to make something else.

6. Production Possibilities: Efficiency
A production possibilities frontier represents an economy working at its most efficient level.
Maximum potential from factors of production
No waste /slack/laziness/inefficiency
On the line is where we are most efficient
Sometimes an economy works inefficiently and it uses fewer resources than it is capable of using. This is known as underutilization.

7. Production Possibilities: Efficiency and Technology/Education
Technology can increase a nation’s efficiency.
Many governments spend money investing in new technology, education, and training for the workforce (financial aid, GI bill, tax breaks)
Increases in human capital lead to increased efficiency
Technology and education can increase economy’s production possibilities

8. Production Possibilities: Efficiency and Technology/Education8

9. Production Possibilities: Growth
A production possibilities curve can also show growth.
- growth increases output for all alternatives.
When an economy grows, the curve shifts to the right.
However, when an economy’s production capacity decreases, the economy slows and the curve shifts to the left.
This is inverse of growth

10. Production Possibilities: Cost
Production possibilities curves show the opportunity costs involved in a production decision.
Cost increases as production shifts from making one item to another.
The law of increasing costs helps explain the production possibilities curve.
Opportunity cost is most desirable alternative given up.
As we move along the curve, we trade off more and more for less and less output.
If we make more shoes, we produce less and less watermelons

11. Production Possibilities: Cost
Answers: 18 million 11

12. Production Possibilities: Law of Increasing Costs

13. Objectives Interpret a production possibilities curve.
Explain how production possibilities curves show efficiency, growth, and cost.
Explain how a country’s production possibilities are impacted by technology/training/education.
Shows tradeoffs between two alternatives. Forced to choose bcs of scarce resources. PPF shows production under full use of resources
On the line: efficiency (no waste, max use); underutilized under PPF
Growth shifts to right – more production
Cost shifts to left – less production
Increases human capital -> leads to growth -> PPF shift right, more production

14. Key Terms
production possibilities curve: a graph that shows alternative ways to use an economy’s productive resources
production possibilities frontier: a line on a production possibilities curve that shows the maximum possible output an economy can produce
efficiency: the use of resources in such a way as to maximize the output of goods and services

15. Key Terms, cont.
underutilization: the use of fewer resources than an economy is capable of using
law of increasing costs: an economic principle which states that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service