Production Possibilities Production possibilities curve Just like individuals

Production Possibilities

Production possibilities curve • Just like individuals, people in a country have to decide what to produce • A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources.

Changing Production Possibilities • PPF can show efficient an economy is, whether an economy is growing and the opportunity cost of producing more of one food or service. • The PPF represents the economy working at maximum efficiency • Efficiency: the use of resources in such a way as to maximize the output of goods and services. • Sometimes economies work inefficiently and that shows on the curve. • Underutilization- the use of fewer resources than the economy is capable of using

Growth

Opportunity Cost • Opportunity cost can be calculated by using a PPF. • The opportunity cost is however much of whatever you give up to gain more of the other product or service • If a country is producing 8 million tons of watermelons and 14 million pairs of shoes and wants to produce 18 million tons of watermelons, the opportunity cost will be 5 million pairs of shoes. • Law of increasing costs- as production shifts from making more of one item to another, more and more resources are necessary to increase production of the second item

Questions 1. How does a production possibilities frontier show efficient uses of a country’s resources? 2. Suppose that a country has the resources to produce 3 million cars and 100 million tons of iron ore every year. Why is it a problem if the country produces 2 million cars and 75 million tons of iron ore one year? 3. Explain how the law of increasing costs would apply in a country if they decided to direct more resources into making shoes than growing watermelons. 4. How would the widespread use of a new type of chemical fertilizer affect a nation’s production possibilities frontier?