1. The Production Possibilities Curve (PPC) Using Economic Models…
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph

2. What is the Production Possibilities Curve?
A production possibilities graph (PPG) is a model that shows alternative ways that an economy can use its scarce resources
This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources
Fixed Technology

3. Production “Possibilities” Tablef 14 12 9 5 2 4 6 8 10
Bikes
Computers
Each point represents a specific combination of goods that can be produced given full employment of resources.
NOW GRAPH IT: Put bikes on y-axis and computers on x-axis

4. Production Possibilities
How does the PPG graphically demonstrate scarcity, trade-offs, opportunity costs, and efficiency? 14 12 10 8 6 4 2
Impossible/Unattainable
(given current resources) A B G C
Bikes
Efficient D
Inefficient/ Unemployment E
Computers

5. Production Possibility Curve
Assume a country can produce two types of goods with its resources – Butter or Cotton
Butter
If it devotes all resources to butter it could produce a maximum of Ym.
If it devotes all its resources to cotton it could produce a maximum of Xm Ym
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) Xm
Cotton

6. Production Possibility Curve
If the country is at point A on the PPG, it can produce the combination of Yo butter and Xo of cotton
Production Possibility Curve
Butter
If the country is at point B on the PPG, it can produce the combination of Y1 butter and X1 of cotton Ym A Yo
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) B Y1 Xo X1 Xm
Cotton

7. Production Possibility Curve
If it reallocates its resources (moving round the PPG from A to B) it can produce more cotton but only at the expense of less butter. The opportunity cost of producing an extra Xo – X1 cotton is Yo – Y1 butter.
Butter Ym A Yo
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) B Y1 Xo X1 Xm
Cotton

8. .B Production Possibility Curve
Production inside the PPF – e.g. point B means the country is not using all its resources
It can only produce at points outside the PPG if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPG further outwards.
Butter C Y1 A .B Yo
The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and can be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C (in a simple context of course – there is always some form of sacrifice of using resources!). Xo X1
Cotton

9. Opportunity Cost Example:
1. The opportunity cost of moving from a to b is…
2 Bikes
2.The opportunity cost of moving from b to d is…
7 Bikes
3.The opportunity cost of moving from d to b is…
4 Computer
4.The opportunity cost of moving from f to c is…
0 Computers
5.What can you say about point G?
Unattainable

10. The Production Possibilities Curve (or Frontier)

11. Production Possibilities
A B C D E
CALZONES
PIZZA
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Constant Opportunity Cost- Resources are easily adaptable for producing either good.
Result is a straight line PPC (not common)

12. Production Possibilities
A B C D E
PIZZA
ROBOTS
List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e.
Law of Increasing Opportunity Cost-
As you produce more of any good, the opportunity cost (forgone production of another good) will increase.
Why? Resources are NOT easily adaptable to producing both goods.
Result is a bowed out (Concave) PPC

13. Constant vs. Increasing Opportunity Cost
Identify which product would have a straight line PPC and which would be bowed out?
Corn
Cactus
Wheat
Pineapples

14. Shifting the Production Possibilities Curve

15. 3 Shifters of the PPC Production Possibilities
4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade

16. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas

17. Production Possibilities
What happens if there is an increase in population?
Robots
Pizzas 17

18. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 18

19. Production Possibilities
What if there is a technology improvement in pizza ovens
Robots
Pizzas 19

20. PPC Practice Draw a PPC showing changes for each of the following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. BP Oil Spill in the Gulf
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education

21. New robot making technology
Question #1
New robot making technology Q
A shift only for Robots
Robots Q
Pizzas 21

22. Question #2 Decrease in the demand for pizza Q
The curve doesn’t shift!
A change in demand doesn’t shift the curve
Robots Q
Pizzas 22

23. Mad cow disease kills 85% of cows A shift inward only for Pizza
Question #3
Mad cow disease kills 85% of cows Q
A shift inward only for Pizza
Robots Q
Pizzas 23

24. Question #4 BP Oil Spill in the Gulf Q
Decrease in resources decrease production possibilities for both
Capital Goods (Guns) Q
Consumer Goods (Butter) 24

25. Question #5 Faster computer hardware Q
Quality of a resource improves shifting the curve outward
Capital Goods (Guns) Q
Consumer Goods (Butter) 25

26. Question #6 Many workers unemployed Q The curve doesn’t shift!
Unemployment is just a point inside the curve
Capital Goods (Guns) Q
Consumer Goods (Butter) 26

27. Question #7 Significant increases in education Q
The quality of labor is improved. Curve shifts outward.
Capital Goods (Guns) Q
Consumer Goods (Butter) 27