The Production Possibilities Curve The production possibilities frontier

The Production Possibilities Curve

• 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 idea of scarcity). • The decrease in production is the opportunity cost (we had to give up some of one good to get more of the other).

Smarties Production Possibilities Frontier A 50 B 40 30 Lose 20 Smarties (opportunity cost) C 20 Gain 20 Dum-Dums 10 0 25 50 70 D 75 Dum-Dums

• 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 Dum-Dums. • This is known as the Law of Increasing Costs. • This happens because resources are not equally suited to the production of both goods.

Smarties A 50 Lose 10 Smarties 40 30 B Lose 20 Smarties C 20 10 0 Gain 50 Dum-Dums 25 Gain 20 Dum-Dums 50 70 D 75 Dum-Dums

• It is possible to produce at any point on the frontier or inside the frontier • Only points on the frontier are efficient. • Any point inside of the frontier is inefficient and shows an underutilization of resources. • When moving from inside the frontier to the frontier there is no opportunity cost because resources were underutilized.

Smarties A Efficient production 50 40 30 B Inefficient Production or F Underutilization of resources C 20 10 D 0 25 50 70 75 Dum-Dums

• Production outside of the frontier is not possible with current available resources. • 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.

Smarties Point G not possible with current resources or technology A 50 G B 40 30 20 With more resources or technology the line shifts outward C 10 D 0 25 50 70 75 Dum-Dums

• Nations must make choices about how to use their available resources (guns and butter). • An increase in the production of military goods (guns) will cause a decrease in the production of consumer goods (butter). • The production possibilities curve can also demonstrate unemployment within an economy (point inside the curve) and economic growth (this curve shifts out).

Guns A Economic Growth of Economy 50 B 40 30 20 Lose 20 Guns Unemployed land, labor or capital U C Gain 20 Butter 10 D 0 25 50 70 75 Butter

A B PRODUCTIONS POSSIBILITIES CURVES A B

C C D D