Production Possibility Curves

So far, we’ve learned that there are VS Choices made about ALLOCATION (econ speak for “dividing up”) Which leads to…. Which leads to the idea that…

AllCosts All Choices involve Costs especially Opportunity Costs Geeky Economists have come up with a saying to illustrate this idea called TINSTAAFL “There Is No Such Thing As A Free Lunch” Resource Limits and Opportunity Costs are shown graphically on a ProductionPossibilityCurve

Production Possibility Curves are used to show 3 important things about an economy…. The first thing that a PPC shows is the Think about the Snakes and Smileys plah doh activity…..

The line on the graph is made from all of the possible combinations of goods the country/individuals can make withALL its resources The line on the graph is made from all of the possible combinations of goods the country/individuals can make with ALL its resources Any combination ON THE LINE is considered to be EFFICIENT since all resources are being used It doesn’t matter what combination of goods the country/individual chooses, as long as it is efficient (on the line) EFFICIENCY means that you are getting the maximum number of goods from limited resources

Any combination of goods that falls INSIDE the PPC line INEFFICIENT is considered to be INEFFICIENT This means that there are left-over resources that are unused Economists don’t like things to be inefficient

OUTSIDE of the PPC UNATTAINABLE Any point that is OUTSIDE of the PPC line is considered to be UNATTAINABLE CANNOT RIGHT NOW own An economy CANNOT reach these points or combination of goods RIGHT NOW with only their own resources…. TRADE …however, it can reach these points if there is TRADE with another economy

The 2 nd important thing that a PPC shows is Moving from one point to another in a PPC means that the economy is making a different choice a different choice about the allocation of resources and choices cause.. Opportunity Costs

Moving from one point to another results in a different combination of goods… Scooters Bicycles A B At Point A, this economy is making 15 scooters and 1 bicycle At Point B, this economy is making 10 scooters and 2 bicycles If this economy chooses to move from point A to point B, it Gains 1 bicycle Gives up 5scooters Meaning that there is an opportunity cost of 5 scooters

The shape of the PPC tells you what type of opportunity cost is occurring Scooters Bicycles # of Scooters # of Bicycles Every time you gain 1 bicycle, you give up 2 scooters CONSTANT OPPORTUNITY COST This is CONSTANT OPPORTUNITY COST The opportunity cost stays the same no matter how many goods you gain

Scooters Bicycles # of Scooters # of Bicycles more and more In this case, every time you gain another bicycle, you give up more and more scooters INCREASING OPPORTUNITY COSTS This is INCREASING OPPORTUNITY COSTS

Scooters Bicycles 0 0 Scooters Bicycle s Constant Opportunity Cost PPCs are ALWAYS a STRAIGHT LINE Increasing Opportunity Cost PPCs are ALWAYS ALWAYS a “BOWED OUT” LINE (curved outward)

The last thing that a PPC does is show you Economic Growth means that the country/individual is able to increase resource limits and produce more goods than before… Economic Shrinking is the opposite: resource limits decrease and produces fewer goods than before

The two things that will cause economic growth are Finding Previously Undiscovered Resources It must be new resources, not ones you knew you had but weren’t using It must be new resources, not ones you knew you had but weren’t using New Technology Makes things faster and easier Makes things faster and easier You can do more in the same amount of time as before You can do more in the same amount of time as before For Economic Shrinking, the opposite is true: you permanently lose resources, or you use old/outdated technology

Economic Growth on a PPC A AB B Draw a new curve to the right of the original (towards the larger numbers on the graph)

B BA A Economic Shrinking on a PPC Draw a new curve to the left of the original (towards the smaller numbers on the graph)

Capital and Consumer Goods These goods are related to Economic Growth… Consumer Goods Goods that consumers use themselves for personal use Goods that consumers use themselves for personal use Examples: Pizza Car Capital Goods Goods that make consumer goods Goods that make consumer goods Examples: Wheat (flour) Factory Choosing to make more of these now means that you will only be able to make the same amount of products in the future Results in a SLOWER RATE OF GROWTH Choosing to make more of these now means you will be able to make more consumer products in the future than you do now Results in a FASTER RATE OF GROWTH

How does this look on a graph? ConsumerConsumer Capital ConsumerConsumer RAPID ECONOMIC GROWTH closer to Capital Goods The point is closer to Capital Goods than Consumer Goods This indicates that more Capital Goods are being made SLOWER ECONOMIC GROWTH closer to Consumer Goods The point is closer to Consumer Goods than Capital Goods This indicates that more Consumer Goods are being made

Last but not least…..UNEMPLOYMENT A person is considered unemployed when he or she WANTS to work, but DOESN’T have a job Economists consider this to be a wasted resource…or to use another term: inefficient This means that on a PPC, you would be located INSIDE the line

Point A shows an economy that is experiencing unemployment If unemployment is REDUCED, that means that MORE people find jobs which means the economy is becoming MORE efficient The new point, B, will be located CLOSER TO THE LINE to show that this economy is closer to using all resources efficiently A B