Production Possibilities Curve Economic Growth and Production The greatest powerpoint about production possibilities ever.

We are in a mixed market economy Therefore, we have to make choices We must choose how to spend our time, energy, and capital We must make a choice on what to study, what to eat, when to work ▫Economics or Calculus ▫Expensive Food or Cheap Food ▫Friday night party or Friday night working

Scarcity, Choice, and Opportunity Cost Opportunity Cost ▫The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

Scarcity, Choice, and Opportunity Cost (cont'd) Questions ▫What is the opportunity cost of attending this economics class? ▫What is the opportunity cost of attending a concert by your favorite band? ▫What is the opportunity cost of increasing research for an AIDS vaccine?

Scarcity, Choice, and Opportunity Cost (cont'd) In economics, cost is always a forgone opportunity.

Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost Scarcity, Choice, and Opportunity Cost (cont'd)

Scarcity, Choice, and Opportunity Cost Opportunity cost and a national monument ▫Allocating land between public and private use ▫The trade-off between the use of land for recreation or for coal Question ▫What does the market value of coal under the National Monument tell us about the perceived social value of the monument?

How to represent opportunity cost? The production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced.

PPC - Studying

The Choices Society Faces (cont'd) Production possibilities assumptions ▫Resources are fully employed ▫Production takes place over a specific time period ▫Resources are fixed for the time period ▫Technology does not change over the time period

The Choices Society Faces (cont'd) Efficiency ▫A point along the line when everyone is employed and all resources are used correctly.

Production Possibilities Curve (PPC) What would happen to the production possibilities curve if you spent more time studying? ▫Let’s say instead of 12, you had 20 hours to study What would happen to your potential grades? What if the subjects overlapped like English and History or Speech

Economic Growth and the Production Possibilities Curve Economic growth ▫Increases the production possibilities of the two goods ▫Occurs over the long run ▫Is illustrated by an outward shift of the production possibilities curve

Figure 2-4 Economic Growth Allows for More of Everything Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-15

Economic Growth When the curve moves out we have economic growth, which is caused by: ▫New Technology ▫More Labor ▫More Supply – a new supply of gasoline found Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-16

The Choices Society Faces PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs ▫At the individual level ▫At the societal level

Guns vs. Butter

Minister of Propaganda Joseph Goebbels stated: "We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." Sometime in the summer of the same year, Herman Göring announced in a speech, "Guns will make us powerful; butter will only make us fat." Another use of the term was Margaret Thatcher's reference in a speech that, "The Soviets put guns over butter, but we put almost everything over guns."

The Trade-Off Between the Present and the Future PPC ▫Can be used to illustrate the trade-off between present and future consumption Consumption ▫The use of goods and services for personal satisfaction Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-22

Figure 2-5 Capital Goods and Growth Consumer goods ▫Goods produced for personal satisfaction Capital goods ▫Goods used to produce other goods Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-23

We can move along the PPC, or have the PPC move out Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-24

Specialization and Greater Productivity Specialization ▫Organization of economic activity among different individuals and regions ▫Leads to greater productivity Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-25

The Choices Society Faces (cont'd) In general, the more specialized the resources, the more bowed the PPC Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-26

Specialization and Greater Productivity (cont'd) Absolute Advantage ▫The ability to produce more units of a good or service using a given quantity of labor or resource inputs ▫Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-27

Specialization and Greater Productivity (cont'd) Comparative Advantage ▫The ability to produce a good or service at a lower opportunity cost ▫Is always a relative concept Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-28

Consider Michael Jordan and some random minor league player MJ has absolute advantage in basketball, and maybe baseball, but the minor league player has a comparative advantage in baseball

Country A has an absolute advantage in the production of both maize and wheat. At all points its production possibility curve lies to the right of that of Country B. Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of maize have been foregone. When Country B produces one more unit of wheat only half a unit of maize is foregone. Fewer resources are foregone if Country B specializes in the production of wheat. In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be traded.

Comparative Advantage and Trade Among Nations (cont'd) When nations specialize where they have a comparative advantage and then trade with the rest of the world ▫Economic efficiency improves ▫Output increases ▫Average standard of living rises Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-31

Division of Labor Rational individuals choose their comparative advantage and specialize. Specialization leads to division of labor. Theorized by Adam Smith in Wealth of Nations Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-32

Division of Labor (cont'd) Division of Labor ▫Assigning different workers different tasks to produce a good or service ▫Organizing a division of labor within a firm to increase output Examples ▫Automobile production ▫Hospital operating room Copyright © 2008 Pearson Addison Wesley. All rights reserved. 2-33