production possibilities curve. a graph that illustrates the possible output combinations for an...
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Production Possibilities Curve
Production Possibilities Curve
A graph that illustrates the possible output combinations for an economy
It illustrates the tradeoffs that society faces in using its scarce resources◦A choice is necessary because producing more
of one item means making do with less of the other
The Production Possibilities Model
The production possibilities model is based on three assumptions:◦an economy makes only two products◦resources and technology are fixed◦all resources are employed to their fullest capacity
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Production Possibilities Curve (a)
The production possibilities curve shows a range of possible output combinations for an economy.◦It highlights the scarcity of resources.◦It has a concave shape, which reflects the law of
increasing opportunity costs.
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Production Possibilities Curve (b)
Figure 1.1, page 8
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Production Possibilities Schedule
Hamburgers Computers point on graph
Production Possibilities Curve
0 1 2 3
1000
600
b
c
1000 0 a
900 1b
600 2 c
0 3d
ComputersH
amb
urge
rs
e
f
inefficient
unattainable
d
900
a
Production Efficiency
Achieved when it is not possible to produce more of one good without producing less of the other good
Occurs only at points on the production possibility curve
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
The Law of Increasing Opportunity CostFigure 1.2, page 10
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
Production Possibilities Schedule
Hamburgers Opportunity Computers point Cost of on graph Computers
Production Possibilities Curve
0 1 2 3
1000
6001000 0
a 100
900 1 b
300
600 2 c
600
0 3 d Computers
Ham
bur
gers
As the quantityof computers
rises, so does theiropportunity cost.
a
b900
c
d
Law of Increasing Opportunity Cost
The concept that as more of one item is produced by an economy, the opportunity cost of additional units of that product rises
Why?
Consider the opposite- what might this graph suggest? Would it make sense?
Hamburgers
Computers
Reason
Resources are not perfectly adaptable to all products
(The assumption also is that the two products are quite distinct)
Law of Increasing Opportunity Cost
Reason:Specialized resources will not be as
productive after transferEach machine/person is specialized in one
area(Resources are specialized)Thus, resources used are not perfectly
substitutable between both goods produced
Law of Increasing Opportunity Cost
Result:The result is smaller increase in
computers as we transfer resources overEach computer costs more than the
previous one in terms of hamburgers
Law of Increasing Opportunity Cost
Examples to explain:◦Human resources: At first, switching a few staff
from one department to another isn’t difficult. However, as you switch more staff, they are taken away from what they are good at and require new training for the new job = more money = higher opportunity cost
◦Capital resources: As production shifts more from one good to the next, even more equipment need to be replaced. Even more money is needed in this replacement process, adding to the opportunity cost
Further Understanding of the Opportunity Cost Calculation
Further Understanding of the Opportunity Cost Calculation
Opportunity Cost = Give up Gain
Opportunity cost of one computer= 4-7 televisions = - 3 = -1.5 tv/cmpt 6-4 computers 2
Shifts in Production Possibilities Figure 1.2, page 10 Copyright © 2005 by McGraw-
Hill Ryerson Limited. All rights reserved.
Production Possibilities Curve
0 3
1000
Computers
Ham
bur
gers
With morecomputers, the curve shifts out
in the nextperiod.
To expand production possibilities curve – You need economic growth – but how?
Specific strategies to increase economic resources
Increase resources by discovery of new oil and gas deposits (Natural resources)
Increase human resources through immigration and improving the skills of the existing workforce
Increase an economy’s capital stock –devote more resources into producing more efficient machines and technology.
To Maximize Utility with Scarce (limited) resources - Production Possibilities Curve
Determined by economic organization or the type of economic system a society chooses to adopt
The economic system adopted will determine the three most basic economic questions
The Basic Economic Questions
There are three basic questions any society must answer:◦what to produce◦how to produce◦for whom to produce
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.