GRAPH 1 PRODUCTION POSSIBILITIES CURVE Mr Mc Ritchie

GRAPH #1: PRODUCTION POSSIBILITIES CURVE Mr. Mc. Ritchie August 26, 2019

Production possibilities Curves (PPC’s) • PRODUCTION POSSIBILITIES CURVES (ALSO KNOWN AS PRODUCTION POSSIBILITIES FRONTIERS) ARE A GRAPHICAL REPRESENTATION OF THE COMBINATIONS OF THE AMOUNTS OF TWO GOODS OR SERVICES THAT AN ECONOMY CAN PRODUCE BY TRANSFERRING RESOURCES FROM ONE GOOD OR SERVICE TO THE OTHER.

Production “Possibilities” Table A B C D E Bikes (Y) 14 12 9 5 0 Computers(X) 0 2 4 6 8 Each point represents a specific combination of goods that can be produced given full employment of resources. Now Graph it! 4

Production Possibilities Frontier Impossible/Unattainable 14 (given current resources) A B Bikes 12 G C 10 8 Efficient D 6 Inefficient/ Unemployment 4 2 E 0 0 2 4 6 8 10 Computers 5

What is the point of the Production Possibilities Curve? • This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency. • • 4 Key Assumptions Only two goods can be produced Full employment of resources Fixed Resources (Ceteris Paribus) Fixed Technology 6

Two Types of Efficiency Productive Efficiency • Products are being produced in the least costly way. • This is any point ON the Production Possibilities Curve Allocative Efficiency • The products being produced are the ones most desired by society. • This optimal point on the PPC depends on the desires of society. 7

Productive and Allocative Efficiency Which points are productively efficient? Which are allocatively efficient? 14 A B 12 Bikes Productively Efficient points are A through D G Allocative Efficient points depend on the wants of society 10 8 C E 6 4 (What if this represents a country with no electricity? ) F 2 D 0 0 2 4 6 8 10 Computers 8

Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2. The opportunity cost of moving from b to d is… 3. The opportunity cost of moving from d to b is… 4. The opportunity cost of moving from f to c is… 5. What can you say about point G? 9

Production Possibilities Table A B C D E CALZONES PIZZA 4 3 2 1 0 0 1 2 3 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Constant Opportunity Cost – Will happen if the resources are easily adaptable for producing either good. 10

The Parks and Rec Dilemma 4. 5 4 4 3. 5 3 Calzones 3 2. 5 2 2 1. 5 1 1 0. 5 0 0 0 1 2 Pizzas 3 4

PER UNIT Opportunity Cost Per Unit opportunity cost = Opportunity Cost Units Gained Example: 1. The PER UNIT opportunity cost of moving from a to b is… 1 Bike 2. The PER UNIT opportunity cost of moving from b to c is… 1. 5 (3/2) Bikes 3. The PER UNIT opportunity cost of moving from c to d is… 2 Bikes 4. The PER UNIT opportunity cost of moving from d to e is… 2. 5 (5/2) Bikes NOTICE: Increasing Opportunity Costs 12

PRODUCTION POSSIBILITIES A PIZZA 18 ROBOTS 0 B 17 1 C 15 2 D 10 3 E 0 4 • List the Opportunity Cost of moving from a-b, b-c, c-d, and d-e. • Law of Increasing Opportunity Cost • As you produce more of any good, the opportunity cost (forgone production of another good) will increase. • IF the Resources are NOT easily adaptable to producing both goods. • Result is a bowed out (Concave) PPC • Which good, pizza or robots, has the increasing opportunity cost?

■ Calculate: 1. The opportunity cost of moving from point A to point D on the graph… 2. The opportunity cost of moving from point C to point A on the graph… 3. The per unit opportunity cost of moving from point A to point B… a. Point B to point D… b. Point E to point C… c. Point A to point E… 4. Draw and label a new point (F) where 2 robots and 12 pizzas are being made.

Shifting the Production Possibilities Curve 15

PRODUCTION POSSIBILITIES 4 Key Assumptions Revisited • Only two goods can be produced • Full employment of resources • Fixed Resources (4 Factors) • Fixed Technology What if there is a change? 4 Shifters of the PPC 1. Change in resource quantity 2. Change in resource quality 3. Change in Technology 4. Change in Trade 16

PRODUCTION POSSIBILITIES Robots Q 14 What happens if there is an increase in population? 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 17

PRODUCTION POSSIBILITIES Robots Q 14 What happens if there is an increase in population? C’ A’ 13 12 11 10 9 8 7 6 5 4 3 2 1 B’ D’ E’ 1 2 3 4 5 Pizzas 6 7 8 Q 18

PRODUCTION POSSIBILITIES Robots Q 14 Technology improvements in pizza ovens? 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 19

PRODUCTION POSSIBILITIES Robots Q 14 Technology improvements in pizza ovens 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 20

PRODUCTION POSSIBILITIES Robots Q 14 Natural disaster 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 21

PRODUCTION POSSIBILITIES Robots Q 14 Natural Disaster 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 22

PRODUCTION POSSIBILITIES Robots Q 14 Robot-caused disaster 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 23

PRODUCTION POSSIBILITIES Robots Q 14 Robots caused disaster 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 Pizzas 6 7 8 Q 24

Capital Goods and Future Growth Mexico - FAVORS CAPITAL GOODS CURRENT CURVE FUTURE CURVE Consumer goods Panama FUTURE CURVE Capital Goods Panama - FAVORS CONSUMER GOODS CURRENT CURVE Consumer goods Mexico 25

PPC Practice Draw a PPC with increasing opportunity cost showing changes for each of the following: Pizza and Robots (3) 1. New robot making technology 2. Decrease in the demand for pizza 3. Mad cow disease kills 85% of cows Consumer goods and Capital Goods (4) 4. BP Oil Spill in the Gulf 5. Faster computer hardware 6. Many workers unemployed 7. Significant increases in education 26

Question #1 New robot making technology Q Robots A shift only for Robots Pizzas Q 27

Question #2 Decrease in the demand for pizza Robots Q The curve doesn’t shift! A change in demand doesn’t shift the curve Pizzas Q 28

Question #3 Mad cow disease kills 85% of cows Robots Q A shift inward only for Pizzas Q 29

Capital Goods (Guns) Q Question #4 BP Oil Spill in the Gulf Decrease in resources decrease production possibilities for both Consumer Goods (Butter) Q 30

Question #5 Faster computer hardware Capital Goods (Guns) Q Quality of a resource improves shifting the curve outward Consumer Goods (Butter) Q 31

Question #6 Many workers unemployed Capital Goods (Guns) Q The curve doesn’t shift! Unemployment is just a point inside the curve Consumer Goods (Butter) Q 32

Question #7 Significant increases in education Capital Goods (Guns) Q The quality of labor is improved. Curve shifts outward. Consumer Goods (Butter) Q 33