Production Possibilities Curve Economic Growth and Production The

Production Possibilities Curve Economic Growth and Production The greatest powerpoint about production possibilities ever.

We are in a mixed market economy • Therefore, we have to make choices • We must choose how to spend our time, energy, and capital • We must make a choice on what to study, what to eat, when to work ▫ Economics or Calculus ▫ Expensive Food or Cheap Food ▫ Friday night party or Friday night working

Scarcity, Choice, and Opportunity Cost • Opportunity Cost ▫ The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want

Scarcity, Choice, and Opportunity Cost (cont'd) • Questions ▫ What is the opportunity cost of attending this economics class? ▫ What is the opportunity cost of attending a concert by your favorite band? ▫ What is the opportunity cost of increasing research for an AIDS vaccine?

Scarcity, Choice, and Opportunity Cost (cont'd) • In economics, cost is always a forgone opportunity.

Scarcity, Choice, and Opportunity Cost (cont'd) Limited Resources & Unlimited Wants Scarcity Choices Opportunity Cost

Scarcity, Choice, and Opportunity Cost • Opportunity cost and a national monument ▫ Allocating land between public and private use ▫ The trade-off between the use of land for recreation or for coal • Question ▫ What does the market value of coal under the National Monument tell us about the perceived social value of the monument?

How to represent opportunity cost? • The production possibilities curve (PPC) represents all possible maximum combinations of total output that could be produced.

PPC - Studying

The Choices Society Faces (cont'd) • Production possibilities assumptions ▫ Resources are fully employed ▫ Production takes place over a specific time period ▫ Resources are fixed for the time period ▫ Technology does not change over the time period

The Choices Society Faces (cont'd) • Efficiency ▫ A point along the line when everyone is employed and all resources are used correctly.

Production Possibilities Curve (PPC) • What would happen to the production possibilities curve if you spent more time studying? ▫ Let’s say instead of 12, you had 20 hours to study • What would happen to your potential grades? • What if the subjects overlapped like English and History or Speech

Economic Growth and the Production Possibilities Curve • Economic growth ▫ Increases the production possibilities of the two goods ▫ Occurs over the long run ▫ Is illustrated by an outward shift of the production possibilities curve

2 -15 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Figure 2 -4 Economic Growth Allows for More of Everything

2 -16 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Economic Growth • When the curve moves out we have economic growth, which is caused by: ▫ New Technology ▫ More Labor ▫ More Supply – a new supply of gasoline found

The Choices Society Faces • PPC is used to demonstrate related concepts of scarcity, choice, and trade-offs ▫ At the individual level ▫ At the societal level

Guns vs. Butter

Guns vs. Butter • Minister of Propaganda Joseph Goebbels stated: "We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns. " Sometime in the summer of the same year, Herman Göring announced in a speech, "Guns will make us powerful; butter will only make us fat. " • Another use of the term was Margaret Thatcher's reference in a speech that, "The Soviets put guns over butter, but we put almost everything over guns. "

2 -22 Copyright © 2008 Pearson Addison Wesley. All rights reserved. The Trade-Off Between the Present and the Future • PPC ▫ Can be used to illustrate the trade-off between present and future consumption • Consumption ▫ The use of goods and services for personal satisfaction

2 -23 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Figure 2 -5 Capital Goods and Growth • Consumer goods ▫ Goods produced for personal satisfaction • Capital goods ▫ Goods used to produce other goods

2 -24 Copyright © 2008 Pearson Addison Wesley. All rights reserved. We can move along the PPC, or have the PPC move out

2 -25 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Specialization and Greater Productivity • Specialization ▫ Organization of economic activity among different individuals and regions ▫ Leads to greater productivity

2 -26 Copyright © 2008 Pearson Addison Wesley. All rights reserved. The Choices Society Faces (cont'd) • In general, the more specialized the resources, the more bowed the PPC

2 -27 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Specialization and Greater Productivity (cont'd) • Absolute Advantage ▫ The ability to produce more units of a good or service using a given quantity of labor or resource inputs ▫ Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs

2 -28 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Specialization and Greater Productivity (cont'd) • Comparative Advantage ▫ The ability to produce a good or service at a lower opportunity cost ▫ Is always a relative concept

Consider Michael Jordan and some random minor league player • MJ has absolute advantage in basketball, and maybe baseball, but the minor league player has a comparative advantage in baseball

• Country A has an absolute advantage in the production of both maize and wheat. At all points its production possibility curve lies to the right of that of Country B. • Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of maize have been foregone. When Country B produces one more unit of wheat only half a unit of maize is foregone. Fewer resources are foregone if Country B specializes in the production of wheat. • In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be traded.

2 -31 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Comparative Advantage and Trade Among Nations (cont'd) • When nations specialize where they have a comparative advantage and then trade with the rest of the world ▫ Economic efficiency improves ▫ Output increases ▫ Average standard of living rises

2 -32 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Division of Labor • Rational individuals choose their comparative advantage and specialize. • Specialization leads to division of labor. • Theorized by Adam Smith in Wealth of Nations

2 -33 Copyright © 2008 Pearson Addison Wesley. All rights reserved. Division of Labor (cont'd) • Division of Labor ▫ Assigning different workers different tasks to produce a good or service ▫ Organizing a division of labor within a firm to increase output • Examples ▫ Automobile production ▫ Hospital operating room