Chapter 1 Section 3 Production Possibilities Curve Production

Chapter 1 Section 3: Production Possibilities Curve

Production Possibilities • Economists use graphs to analyze the choices & trade offs that people make to help us see how one value relates to another value • Production possibilities curve shows alternative ways to use an economy’s productive resources

–The axes of the graph can show categories of goods & services, or any pair of specific goods or services • Drawing a production possibilities curve –Start by deciding which goods & services to examine

• The production possibilities frontier is the line that shows the maximum possible output for that economy. Production Possibilities Graph 25 Shoes (millions of pairs) 0 15 8 14 14 12 18 9 20 5 21 0 Shoes (millions of pairs) Watermelons (millions of tons) 20 15 10 5 0 a (0, 15) b (8, 14) c (14, 12) d (18, 9) A production possibilities frontier e (20, 5) f (21, 0) 5 10 15 20 Watermelons (millions of tons) 25

Trade offs • Using the factors of production to make one product means that fewer resources are left to make something else

Efficiency, Growth, & Cost • Graph shows us how efficient an economy is, whether an economy has grown or shrunk, & the opportunity cost of a decision to produce more of one good or service

Efficiency • Production possibilities frontier represents an economy working at its most efficient level of production • Def. –using resources in such a way as to maximize the output of goods & services

Production Possibilities Graph Shoes (millions of pairs) • Any point inside the line indicates an underutilization of resources 25 20 S 15 a (0, 15) 10 b (8, 14) c (14, 12) g (5, 8) 5 d (18, 9) e (20, 5) A point of underutilization 0 5 10 f (21, 0) 15 20 Watermelons (millions of tons) 25

Growth • Production possibilities curve the country’s current production possibilities as if the country’s resources were frozen in time –In real time, the quantity of resources is constantly changingcurve will move

• When an economy grows, economists say that the entire production possibilities curve has “shifted to the right” • When a country’s production capacity decreases, the curve shifts to the left –Ex: war, aging population

Production Possibilities Graph 25 Future production Possibilities frontier T Shoes (millions of pairs) • If more resources become available, or if technology improves, an economy can increase its level of output & grow. 20 S 15 a (0, 15) b (8, 14) c (14, 12) 10 d (18, 9) 5 e (20, 5) f (21, 0) 0 5 10 15 20 Watermelons (millions of tons) 25

Cost • Not necessarily money • Def. - alternative we give up when we choose one option over another • Opportunity cost

• Law of increasing costs- as production switches from one item to another, more & more resources are necessary to increase production of the second item –Opportunity cost increases • As we move along the curve, we trade off more & more to get less & less additional output

• To move from point c to point d on this graph has a cost of 3 million pairs of shoes. Production Possibilities Graph 25 0 15 8 14 14 12 18 9 20 5 21 0 Shoes (millions of pairs) Watermelons Shoes (millions of tons) (millions of pairs) 20 15 c (14, 12) 10 d (18, 9) 5 0 5 10 15 20 25 Watermelons (millions of tons)

Resources & Technology • When economists collect data to create a production possibilities curve, they must first determine which goods & services a country can produce, given its current resources

• Land, natural resources, work force, & physical & human capital Technology • A country’s production possibilities depend on both its technological level & the resources it has available