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Chapter 1 section 3: Production possibilities curve

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Title: Chapter 1 section 3: Production possibilities curve


1
Chapter 1 section 3Production possibilities
curve
  • Name __________________

2
Production possibilities
  • Production possibilities curve a graph that
    shows alternative ways to use an economys
    resources
  • Axis shows categories of goods and services
    (farm goods, factory goods)
  • Can also display any pair of specific goods or
    services (hats and shoes)

3
Drawing a curve
  • Begin by deciding which goods or services to
    examinelets go with farm goods and factory goods
    (shoes and watermelon)
  • Therefore shoes and watermelons become the values
    shown on the graph
  • 0 watermelons, all shoes0 shoes, all watermelons

4
One more choice
  • It isn't always all or nothingthere are other
    choices
  • What if we wanted to make watermelons and shoes?
  • If you plot those pointsyou have just drawn a
    production possibilities frontier-its shows the
    maximum combination for those two products

5
Production possibilities curve
6
Trade-offs
  • Each point on the curve reflects a trade-off
  • Examples the top has more shoes, but fewer
    watermelons
  • The bottom has more watermelons, but fewer shoes
  • Why? Land, labor, capital are scare
  • More of one thing means less of another

7
What can a graph show us?
  • How efficient the economy is
  • Whether the economy has grown or shrunk
  • Opportunity cost of a decision to produce more of
    one good or service

8
Efficiency
  • The production possibilities frontier represents
    an economy working at its most efficient level of
    production
  • Efficiency using resources in such a way as to
    maximize the production or output of goods and
    services
  • Sometimes things happen (workers laid off, bad
    conditions)
  • At any point inside the curveunderutilization
  • Underutilization means using fewer resources than
    the economy is capable of using

9
Growth
  • The curve represents as if it were frozen in
    time, although the country and resources are
    constantly changing
  • People, land, technology
  • When an economy grows, economists say the entire
    production possibilities curve has shifted to
    the right
  • When an economy shrinks, they say shifted to the
    left
  • Go to war and lose land, population ages, becomes
    less healthy (labor and human capital) would
    decrease

10
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11
Cost
  • Cost the alternative we give up when we choose
    one option over another
  • ie opportunity cost
  • When you go from no watermelons to 8 million tons
    of watermelons, what is the cost?
  • What about 20 watermelons?
  • Switching from shoes to watermelons cost
    somethingincreasing costs
  • Each time we grow more watermelons, the sacrifice
    in terms of shoes increases
  • Shows the it costs an additional 5 million pairs
    of shoes to increase watermelon production by
    only 1 million tons

12
  • Law of increasing costs
  • As production switches from one item to another,
    more and more resources are necessary to increase
    production of the second item
  • Opportunity cost increases
  • Why?
  • Because some resources are better suited for use
    in farming, while others are more appropriate for
    manufacturing. Moving resources from factory to
    farm production means that farmers must use
    resources that are not as suitable for farming.
  • As we move along the curve, we trade more and
    more to get less and less additional output

13
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14
Resources and technology
  • When economists collect data to create production
    possibility curves, they first determine which
    goods and services a country can produce, given
    its current resources.
  • Land and natural resources, work force, physical
    and human capital (technology)
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