THE PRODUCTION POSSIBILITIES CURVE OH THE POSSIBILITIES 820

THE PRODUCTION POSSIBILITIES CURVE! OH, THE POSSIBILITIES! 8/20 Intro - How does a nation and the businesses within decide what and how much to produce?

PRODUCTION POSSIBILITIES CURVE • Resources are scarce and in order to best allocate those resources, you can utilize a production possibilities curve.

GUNS OR BUTTER! • Theoretical Economy with only 2 goods. • How much of each good to produce?

COSTS • Check the board! • What is the cost of producing 6 Giant Robot Warriors when you’ve previously been producing only 4? • This is your opportunity cost. • Constant v. Increasing

SO HOW DOES THIS WORK IN REAL LIFE? • Outsourcing jobs to cheaper places. • Vietnam – Taking over Nissan manufacturing end of the automobile industry. • Auto engineers in Vietnam are paid around $200/month, only 1/10 th of what their counterparts make in Japan. • Why are auto makers moving high-skilled jobs into lowcost markets? • How might production and quality control be compromised if Nissan designs cars in Vietnam?

LAW OF INCREASING COSTS • Real World, P. 17 • As you shift from producing one thing to another, more and more resources are needed to increase production of the second thing. • You can’t magically shift production without incurring costs. • Same goes with life decisions. Changing Majors. • Switching from Art History to World History = Constant Costs • Switching from Art History to Mech. Engineering = Increasing costs

APPLICATION • How does a nation decide what and how much to produce? • What are the trade-offs when deciding to focus on one product or service over another? • The web to the right gives a general overview of Production Possibilities Curves.

EXIT QUESTION! • How does the law of increasing costs play a role in your life?