PRODUCTION POSSIBILITY CURVE WARMUP 1014 In your notebook

PRODUCTION POSSIBILITY CURVE

WARM-UP 10/14 In your notebook answer the following: What is scarcity? Give me an example of scarcity. What are the 4 Factors of Production?

PRODUCTION POSSIBILITIES CURVE Vocabulary 1. Economic Model: simplified representation of economic forces. 2. Production Possibilities Curve (PPC): graph used by economists to show the impact of scarcity on an economy.

OBJECTIVES • Be able to describe what a production possibility curve is and how it is constructed. • Be able to explain what economists learn from using production possibility curves. • Be able to analyze how production possibilities curves show economic growth.

GRAPHING THE POSSIBILITIES • All economic choices involve trade-offs • Economists have created economic models to clarify trade-offs • Example: Production possibilities curve

PPC • A graph used to show the impact of scarcity on an economy by showing the maximum number of goods or services that can be produced using limited resources.

PPC ASSUMPTIONS • Based on assumptions that simplify the economic interactions: 1. Resources are fixed 2. All resources are fully employed 3. Only two things can be produced 4. Technology is fixed

HOW IS THE PPC USED? • The curve on a PPC represents the border between what is possible to produce and what is not possible to produce. • Useful for businesses, governments, and individuals

EXAMPLE • Suppose you are preparing food for a soup kitchen and have the ingredients to make 12 loaves of bread or 100 bran muffins or some combination of the two. • A PPC can help you decide what to make. • (Interactive model)

WHAT WE LEARN FROM PPCS • No economy actually operates according to the simplified assumptions underlying the PPC. • Economists use it because it spotlights concepts that work in the real world of scarce resources. • One important concept that is revealed is PPC efficiency.

NEW VOCABULARY • Efficiency: involves producing the maximum amount of goods and services possible. • Underutilization: means producing fewer goods and services than possible

EFFICIENCY & UNDERUTILIZATION • “Guns” vs. “Butter” • Guns is shorthand for military spending • Butter is shorthand for consumer products

GUNS VS. BUTTER • Regardless of the combination, each point represents efficiency, the most that can be produced with the available resources. • Any point inside the curve represents underutilization, or the inefficient use of available resources.

SHAPE OF THE PPC • The shape of the PPC shows a 3 rd important economic concept – the law of increasing opportunity costs • As production switches from one product to another, increasingly more resources are needed to increase the production of the second product