The Production Possibilities Curve Lesson 1 3 TradeOffs

The Production Possibilities Curve Lesson 1. 3

Trade-Offs and Opportunity Costs Using the Production Possibilities Curve • We discussed Trade-Offs and Opportunity costs in lesson 1. 1, now we are going to create a visual representation of these concepts in a simple graph, called the Production Possibilities Curve. • While it is obvious that in any given scenario there can be many choices, we simplify this by using only two.

Production Possibilities • One of the simplest methods to describe trade offs is the production possibilities curve. Each axis shows how much of one product can be made. • The curve represents the maximum productivity of two different items. – Points A and B represent two choices of maximum production. – Point C represents underutilization – Point D represents an impossible objective

Production Possibilities Curve • The production possibilities curve shows the trade off, where the more of one item you choose to produce means a corresponding decrease in the other item. • The curve also shows that the trade off may not be a 1 to 1 ratio (straight line. ) At each end, it only takes a small diversion of resources to produce a large quantity of the other item. – In the graph below, the initial trade off of only 25 guns produces 75 butters, but at the other end of the spectrum, it takes 70 guns to make only 10 butters. – Why would this be true, and could there be products with a trade off that is linear? ?

Growth and Contraction using the Production Possibilities Curve • • When growth occurs (adding more farmland, technological improvements…) the curve will move outward, increasing the maximum potential. When contraction occurs (disasters, loss of land, economic downturn) the curve will move inward, decreasing the maximum potential. The expansion or contraction does not need to be even, and can affect one side more than the other. Growth can occur due to investments increasing factory size, planting more orange trees, or technology that makes people more efficient.