Production Possibilities Curve The Production Possibilities Curve illustrates

Production Possibilities Curve • The Production Possibilities Curve illustrates the trade-offs facing an economy producing two goods. • The production possibilities frontier (the line) shows all the possible combinations of the two products using all the available resources. • Since we are using all available resources, increasing the production of one of the goods means decreasing the production of the other good (illustrates the idea of tradeoffs).

Efficiency • Production is efficient if there is not a way to make some people better off without making other people worse off. • All points on the frontier are efficient. • Any point inside of the frontier is inefficient and shows an underutilization of resources. It represents unemployment within a business or within a country. • Production is allocatively efficient if the mix of goods is what people want to consume.

Opportunity Cost • As production of one good is increased, production of the second must be decreased • This loss of production is the opportunity cost: what must be given up. • If the cost is constant the production possibilities curve will be a straight line.

Increasing Opportunity Cost • However, economists believe that opportunity costs are not constant along the frontier. • As resources are moved from the production of Smarties to Dum-Dums, increasingly larger amounts of Smarties must be given up to get decreasingly smaller amounts of Dums. • This happens because resources are not equally suited to the production of both goods. • This is known as the Law of Increasing Costs.

Economic Growth • Production outside of the frontier is not possible with current available resources. • However, if there is an increase in land, labor or capital OR technology then the frontier will shift outwards. • A shift out means that more of both products can be produced. • This shift represents economic growth