Production possibilities Chapter 1

To decide what and how much to produce, economists use a tool known as a production possibilities curve

Production possibilities curve A graph that shows alternative ways to use an economy’s productive resources

Drawing a PP Curve Decide which goods or services to examine Horizontal axis is Product 1 Vertical axis is Product 2 The curve is how many of each product you can produce using the available resources The line is the Production Possibilities Frontier Shows combinations of the production Snapshot—current production possibilities as if a country’s resources were frozen in time

Trade-offs on PP Curve Each point on the curve reflect trade-offs These trade-offs are necessary because the factors of production are scarce Making one product means that fewer resources are left to make something else

Efficiency, growth, and cost The PP Curve gives us useful information How efficient the economy is If the economy is growing Opportunity cost of producing more of one good or service

efficiency The use of resources in such a way to maximize the output of goods and services Any point in the PP Frontier indicates underutilization The use of fewer resources than the economy is capable of using

Growth When an economy grows, economists say that the production possibilities curve shifts to the right When a country’s production capacity decreases, the curve shifts to the left

cost The PP Curve determines the cost involved in a decision Cost does not necessarily mean money—it is opportunity cost Increasingly expensive trade-offs explained through the law of increasing costs As production shifts from making one item to another, more and more resources are necessary to increase production of the second item Opportunity cost increases The law of increasing costs explains why pP Curve curves As we move along the curve , we trade off more and more for less and less added output

Technology and education Technology is the process used to create goods and services So economists must assess each country’s level of technological know- how Technology is one of the factors that can increase a nation’s efficiency Governments spend money investing in new technology They also invest in education so workers can create and utilize technology Highly-skilled workers can increase efficiency and lead to economic growth