1. PRODUCTION POSSIBILITY CURVE
PPC
WATCH FOR *

2. Production Possibility Curve
*Key Points
Production Possibility Curve
What is it? What is it used for?
What does it look like?
Points-Inside & Outside
SHAPES

4. Define
Macroeconomics-
Microeconomics-

5. Macro economics – concerned
with the economy as a whole
Macro examines economy of countries
OR _______________ .
. 2. Micro economics –
examines individuals, households,
companies & ________________

6. **** Is the following Micro or Macro?
1. DELL raises price of PC’s last year.
2. Unemployment was 5.4% for the U.S. workforce.
3. Unemployment in the auto industry was 8% last year.
4. USA National Bank lowered its interest rates on CDs to 8%.
5. The Inflation rate rose to 2.7% last year.
6. The computer industry laid off 8% of its workers last year.
7. The price of gasoline rose 25% last year.
8. The EU (European Union) admits 2 new countries.
9. Weak Real Estate market in Pinellas Park.
10. Home sales in US down from last year.

7. MODELS EX’s Oversimplification of reality
Economists use a popular model called a ….

8. PRODUCTION POSSIBILITY CURVE
PPC

9. What is a production possibilities curve (PPC) ?
A graph that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology

10. What is a production possibilities frontier (PPF)
A line that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology
They are the same

11. PPC: FISH & JEANS
If the country is at point A on the PPF It can produce the combination of _____ FISH and ____ BLUE JEANS
FISH 3 A 2
What happened when production moved from Point A to B ? _______
OC= OB=
These slides introduce the diagrams and then have animation to show how points on the PPF relate to different resource use and allocation. Moving from point A to point B involves sacrificing some capital goods to gain more consumer goods and thus demonstrates the opportunity cost involved. Students doing history can be reminded about the resource allocation decisions taken by Stalin during the 1930s and the subsequent decisions by successive Soviet premiers since the war about what resources are important for a nation like the USSR! (you might of course have to explain a little bit about what the USSR was!) B 1 2 3
3.5
BLUE JEANS

12. From T to R OB= ? OC= ?

13. * Q WHY SHOULD YOU CARE?? A- What if…?
is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one, to the production of the other.
The curve is used to describe a country’s choice between two different goods.
Q WHY SHOULD YOU CARE??
A- What if…? *

14. What 2 Types of Goods must ALL countries produce?
GUNS & BUTTER: THE CLASSIC ECONOMIC MODEL

15. (5) PPC Concepts Scarcity /Choices - represented by pts A, B. or C.
2. Opportunity Cost is illustrated in terms of moving
from one point to another when resources are utilized
to their full potential. [must make choices]
3. TRADE OFFS
4. Efficiency - maximum output
So… any point on the line (PPF) represents an economy working at its most efficient.
5. Economic growth

16. INSIDE & OUTSIDE the PPF
No ‘ideal’ point on the curve
Any point inside the curve – suggests resources are not being utilised efficiently INEFFICIENT or UNDERUTILIZED
Any point outside the curve – not attainable with the current level of resources
UNATTAINABLE or IMPOSSIBLE
* Useful to demonstrate economic growth and opportunity cost

20. Production Possibilities CurveA
Efficient
Unattainable
Military Goods
Inefficient B
Consumer Goods

21. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable A B W C
Attainable
& Efficient
Robots (thousands) D
Attainable
but
Inefficient E
Pizzas (hundred thousands) Q

22. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES Q
Robots (thousands)
Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unemployment &
Underemployment
Shown by Point U
More of either or
both is possible U

23. What is OC of moving from inefficient to efficient? (F to PPF)

24. What is OC of A to B?

25. GUNS & BUTTER: WWII

26. Going to War (U. S. ) When the U. S
Going to War (U.S.) When the U.S. entered WWlI, we had severe unemployment.
We were able to step up production of consumer goods and war materials simply by
getting to full production. We went from 14.6% unemployment in 1940 to 1.2% in 1944.
Over 7 million people went to work that were not working in 1940.
United States
[Beginning of WWII] C
War Goods F
Civilian Goods
Going to War(Russia). Russia, on the other hand, entered WWII at full capacity.
So their preparedness entailed a shifting of resources from civilian goods and a drop in
their standard of living.
The U.S. position was similar as we entered the Viet Nam War at full employment.
Our attempt to achieve more “guns and butter” was doomed.
We were trying to spend beyond capacity and ended up with double
digit inflation in the 1970s. C
Russia
[Beginning of WWII]
War Goods D
Civilian Goods

28. To Eat or To War? We can be militarily strong, but be very hungry
Economies/Countries must choose how they want to allocate resources efficiently
To Eat or To War?
We can make lots of food, but be vulnerable to attack
We can be militarily strong, but be very hungry
Prompting republican senator from nebraska chuck hagel “It could become an adjunct to the exec branch”
Cheney quote: I have repeatedly seen an erosion of the powers and the ability of the president of the United Sates to do his job… [we believe we should] pass on our offices in better shape than we found them to our seccessors. The bush admin has made a conscious political decision to reassert exectuive-branch prerogatives

29. Macro OR Micro ?

30. PPC :Assumptions Given period of time (FREEZE Time) &
(1) Available resources are fixed
(2) NO in Technology

31. PPC & SCARCITY ?
Scarcity limits an economy(or country) to points ______ or _______ its PPF

32. BOB’S MEAN DOG

33. Shapes & Shifts

34. SHAPE-*set up 2 Col Notes

36. Linear - perfectly adaptable (or substitutable) to the production of both types of goods OC= ?

38. CURVED OR CONCAVE

39. **Concave vs. Convex***** ??????????????????
A concave surface curves inward. The word is easy to remember because a concave indentation in a wall makes a cave.

40. SHAPE ? Law of Increasing OC
* Resources are not all perfectly adaptable to the production of both types of goods SO…. Costs increase as you shift resources to produce a new good.
Law of Increasing OC : as the production of one good rises, the opportunity cost of producing that good increases.
It will be a CONCAVE curve

41. x

44. Law of Increasing Opportunity Cost

45. *The opportunity cost of 1 fish is the amount of coconuts Robinson could be collecting if he were not fishing.
It takes him an hour to catch one fish (a lousy fisher, no doubt).
Since he can collect 10 coconuts per hour, the opportunity cost of one fish is ____ coconuts.

46. *"when more and more time and effort is devoted to one activity, the cost in terms of other activities sacrificed becomes greater and greater."
* This is a principle of human behavior which everyone has seen in action. One example : tragedy of alcoholism (or drug addiction).

48. *Q-What can we conclude about OC based on the shape of this PPC?
A- Resources appear to be perfectly substitutable, or equally adaptable to the production of either bullet trains or space missions.

49. Question   Typically production possibilities frontiers are bowed outward (concave) because
A) OC’s are always positive. B) the problem of scarcity is ever present. C) producing one more of one good always entails producing less of another. D) resources are not equally well suited to the production of all goods and services. E) as we produce more and more of one good, the OC of producing that good declines.

50. SHIFTS

51. What is economic growth?
The ability of an economy to produce greater levels of output, an outward shift of its PPF

52. .B SHIFTS = GROWTH Lift the ASSUMPTION C A Good A Y1 Yo Xo X1 Good B
The next slide allows the lecturer to demonstrate what happens when resources are not used efficiently and production takes place within the PPF. It then allows the expansion of the PPF and can be used to illustrate the issue of economic growth and where opportunity cost does not exist if the economy moves from point A to point C (in a simple context of course – there is always some form of sacrifice of using resources!). Xo X1
Good B

53. What if there is a change? 3 Shifters of the PPC
Change in (FOP)resource
2. Change in Technology
3. Change in Trade

54. * And How Is Economic Growth Demonstrated on a Graph? Like This
[Ability to produce a larger
total output over time] C A b
Capital Goods a B D
Consumer Goods

55. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Notes...
Economic Growth Q
Robots (thousands)
Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1
The ability to produce a larger total output - a rightward shift PPC

56. 2. Technological advances
PRODUCTION POSSIBILITIES
Caused by... Q
Robots (thousands)
Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Increase in resources
(FOP’s)
2. Technological advances
R & D
More of either or
both is possible

57. -massive new sources of oil and coal are found.
-new government comes into power that forbids the use of automated machinery
-Suppose there is a major technological breakthrough in ONLY one industry on PPF

58. Economic Growth pushes the PPF out – better combinations are possible.
PPF with new Wheat-making technology
The new PPF, with growth in Wheat-making possibilities
The old PPF
Prompting republican senator from nebraska chuck hagel “It could become an adjunct to the exec branch”
Cheney quote: I have repeatedly seen an erosion of the powers and the ability of the president of the United Sates to do his job… [we believe we should] pass on our offices in better shape than we found them to our seccessors. The bush admin has made a conscious political decision to reassert exectuive-branch prerogatives

59. SHIFTS : in Resource Availability
Discovery of new resources(FOP’s)
EX’s LABOR – longer hrs (+)
- training, motivation (+)
- demand more $ (?)
LAND- Floods (?) Drought(?)
CAPITAL GOODS- Oil after KATRINA (?)
ENTREPRENEURSHIP- Brain Drain

60. Technological Advance
Computers A
Pizzas

62. NEG SHIFTS

63. PRODUCTION POSSIBILITIES
Assumes...
Only Two Products
Fixed Resources
Fixed Technology
for example...
A Capital Good
A Consumer Good

64. PRODUCTION POSSIBILITIES
What if we could only produce ...
10,000 Robot Arms or
400,000 Pizzas
Using all of our resources, to
get some pizza, we must give
up some robot arms!
for example...

65. Plotting PPC

66. PRODUCTION POSSIBILITIES
schedule
PIZZA
(in hundred thousands)
Robots
(in thousands) 66

67. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
Schedule
schedule
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 67

68. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 68

69. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in schedule form
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 69

70. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 70

71. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 71

72. Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
in table form
PIZZA
(in hundred thousands)
Robots
(in thousands)
graphical form
Robots
(thousands)
Pizzas (hundred thousands) 72

73. THE END
ANOTHER MR D PRODUCTION