1. Production possibilities
Chapter 1

2. To decide what and how much to produce, economists use a tool known as a production possibilities curve

3. Production possibilities curve
A graph that shows alternative ways to use an economy’s productive resources

4. Drawing a PP Curve Decide which goods or services to examine
Horizontal axis is Product 1
Vertical axis is Product 2
The curve is how many of each product you can produce using the available resources
The line is the Production Possibilities Frontier
Shows combinations of the production
Snapshot—current production possibilities as if a country’s resources were frozen in time

5. Trade-offs on PP Curve Each point on the curve reflect trade-offs
These trade-offs are necessary because the factors of production are scarce
Making one product means that fewer resources are left to make something else

6. Efficiency, growth, and cost
The PP Curve gives us useful information
How efficient the economy is
If the economy is growing
Opportunity cost of producing more of one good or service

7. efficiency
The use of resources in such a way to maximize the output of goods and services
Any point in the PP Frontier indicates underutilization
The use of fewer resources than the economy is capable of using

8. Growth
When an economy grows, economists say that the production possibilities curve shifts to the right
When a country’s production capacity decreases, the curve shifts to the left

9. cost The PP Curve determines the cost involved in a decision
Cost does not necessarily mean money—it is opportunity cost
Increasingly expensive trade-offs explained through the law of increasing costs
As production shifts from making one item to another, more and more resources are necessary to increase production of the second item
Opportunity cost increases
The law of increasing costs explains why pP Curve curves
As we move along the curve , we trade off more and more for less and less added output

10. Technology and education
Technology is the process used to create goods and services
So economists must assess each country’s level of technological know- how
Technology is one of the factors that can increase a nation’s efficiency
Governments spend money investing in new technology
They also invest in education so workers can create and utilize technology
Highly-skilled workers can increase efficiency and lead to economic growth