Production Possibilities Curve What to produce...in what amount?

Objectives Students will understand the Three economic questions that all must face. Students will understand the Production Possibilities Curve and how it relates to SCARCITY and OPPORTUNITY COSTS

Review Define Scarcity: The condition of having unlimited wants and limited resources Define Opportunity Cost: The most desirable alternative given up as a result of a decision

Three Economic Questions Every society (BIG scale) and business (small scale) must answer THREE Economic Questions: 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? What we will focus on today with PPC

Three Economic Questions Why must every society or business face these three questions? SCARCITY!

What Goods to Produce? Why must a society or business decide which goods to produce? Limited Resources—societies/businesses face trade-offs Production of one item has an opportunity cost of producing another Example: If a business decides to use all of its resources to produce one item, then it will not be able to produce any others

How Should Goods and Services be Produced? What is needed to produce goods and services? RESOURCES: Land, Labor, and Capital Why do businesses/societies have to make this decision? Resources can be utilized differently EXAMPLE: Farms Decision about whether to use hand tools or machinery Decision about how many workers to employ

Who Consumes the Goods and Services? Societies must decide how to distribute goods and services… Distributed to those who can pay the price Distributed based on need Distributed equally to everyone

Back to What Goods to Produce? Economists look at this question and create what is known as the Production Possibility Curve or Frontier

Production Possibilities Curve Graph 1 Peanuts Oranges At this Point What is Being Produced in Greater Quantity? Why does the Production of these two products follow a curve? Representation of production at its most efficient How many Oranges are being produced at this point? INCREASING OPPORTUNITY COSTS

Production Possibilities Curve Graph 2 Peanuts Oranges Why would the curve shift outward? Increase in the Amount of Resources More Labor From Another Country New Land Resources Increased Capital Technological Advances New Equipment/ Machinery Future Production Possibilities Frontier ECONOMIC GROWTH!!!

Production Possibilities Curve Graph 3 Peanuts Oranges Why wouldn’t production always be at its most efficient? Problems with Labor Loss of Land Resources Machinery Breaks Down UNDERUTILIZATION When the economy/business uses less resources than the economy is capable of using

Production Possibilities Graph Graph 4 Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) 0 a (0,15) b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0)

Law of Increasing Costs As production shifts from making one good or service to another more and more resources are needed to make the second good or service. Our example….

Compare the cost of moving from point B to C to the cost of moving from point D to E Watermelons (millions of tons) Shoes (millions of pairs) Production Possibilities Graph Watermelons (millions of tons) 814 b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) 0 a (0,15) 15

Some Practice… Reffonomics Reffonomics 2

Closure Production Possibilities Curve W.S. Focus: Graphing Skills Understanding how scarcity and opportunity costs factor into the PPC