Module The Production Possibilities Curve Model 3 KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: The importance of trade-offs in economic analysis What the production possibilities curve model tells us about efficiency opportunity cost, and economic growth The two sources of economic growth - increases in the availability of resources and improvements in technology

The Production Possibilities Curve All models have simplifying assumptions: Available supply of resources is fixed in quantity and quality at this point in time. Technology is constant during analysis. Economy produces only two types of products.

Opportunity Cost - Constant A PPC with a straight line has a constant slope, and therefore, constant opportunity cost.

Opportunity Cost - Increasing Question for Students: If we want more bulldozers, and if we were controlling this economy, what would we need to do? We would need to move some pizza makers (and capital, and natural resources) to bulldozer production. Has anyone ever had a bad pizza or a great pizza? Is it safe to say that not all pizzas are created equal? Then is it also safe to say that not all pizza makers (the labor) are created equal? Are some pro athletes better than others? Are some acres of land more fertile (for growing food) than others? Are all laptop computers equal, or are some faster than others?   The point is that resources are not created equal. Can the students agree that some units of labor are better pizza makers than others? If that’s the case, then let’s redraw the PPC. Redraw the PPC with a concave shape. You don’t need numbers. There is something that economists call the “Law of increasing opportunity costs” 1. The amount of other products that must be foregone to obtain more of any given product is called the opportunity cost. 2. The more of a product produced the greater is its (marginal) opportunity cost. 3. The slope of the production possibilities curve becomes steeper (going left to right), demonstrating increasing opportunity cost. This makes the curve appear bowed out, concave from the origin. Why? 1. Economic recourses are not completely adaptable to alternative uses. 2. To get increasing amounts of Bulldozers, resources that are not particularly well suited for that purpose must be used. Workers that are accustomed to producing Pizza in a restaurant may not do well as heavy equipment builders. A pizza oven is a piece of capital equipment that is not very adaptable to building Bulldozers.

Economic Growth Economic growth Expansion of the economy’s production possibilities Availability of resources (land, labor, capital, entrepreneurship) Technology Economic growth means an expansion of the economy’s production possibilities: the economy can produce more of everything.  

Economic Growth Draw a new PPC that has shifted outward in a roughly parallel manner. How could this happen? When factors of production expand in quantity or quality. A bigger or a more educated/skilled work force. When technological advances are occurring. Technology always advances, we don’t forget our technology.  

Figure 3.1 The Production Possibilities Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 3.2 Increasing Opportunity Cost Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 3.3 Economic Growth Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers