The Production Possibilities Curve

The production possibilities frontier (the line) shows all the possible combinations of the two products using all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production of the other good (illustrates idea of scarcity). The decrease in production is the opportunity cost (we had to give up some of one good to get more of the other).

Smarties Dum-Dums Production Possibilities Frontier A 50 B 40 Lose 20 Smarties (opportunity cost) 30 C 20 Gain 20 Dum-Dums 10 D 25 50 70 75 Dum-Dums

Opportunity costs are not constant along the frontier. As resources are moved from the production of Smarties to Dum-Dums, increasingly larger amounts of Smarties must be given up to get decreasingly smaller amounts of Dum-Dums. This is known as the Law of Increasing Costs. This happens because resources are not equally suited to the production of both goods.

Smarties Dum-Dums A 50 Lose 10 Smarties B 40 Lose 20 Smarties 30 C 20 Gain 50 Dum-Dums Gain 20 Dum-Dums 10 D 25 50 70 75 Dum-Dums

It is possible to produce at any point on the frontier or inside the frontier Only points on the frontier are efficient. Any point inside of the frontier is inefficient and shows an underutilization of resources. When moving from inside the frontier to the frontier there is no opportunity cost because resources were underutilized.

Smarties Dum-Dums Efficient production A 50 B 40 Inefficient Production or Underutilization of resources F 30 C 20 10 D 25 50 70 75 Dum-Dums

Production outside of the frontier is not possible with current available resources. If there is an increase in land, labor or capital OR technology then the frontier will shift outwards. A shift out means that more of both products can be produced.

Point G not possible with current resources or technology Smarties A 50 G B 40 30 With more resources or technology the line shifts outward C 20 10 D 25 50 70 75 Dum-Dums

Nations must make choices about how to use their available resources (guns and butter). An increase in the production of military goods (guns) will cause a decrease in the production of consumer goods (butter). The production possibilities curve can also demonstrate unemployment within an economy (point inside the curve) and economic growth (this curve shifts out).

Guns Butter A Economic Growth of Economy 50 B 40 30 Lose 20 Guns U C Unemployed land, labor or capital 10 Gain 20 Butter D 25 50 70 75 Butter

A PRODUCTIONS POSSIBILITIES CURVES A B B

C C D D