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Module 3- The P roduction P ossibilities Curve

Module 3- The P roduction P ossibilities Curve. BY J. A. Sacco. Combination M-16 Rifles CD-ROM Players. Society’s Trade-off Between M-16 Rifles and CD-ROM Players. A 10.0 0 B 9.6 2 C 9.0 4 D 8.0 6 E 6.6 8 F 4.5 10 G 0 12. Point R is unobtainable. R. S.

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Module 3- The P roduction P ossibilities Curve

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  1. Module 3- The Production Possibilities Curve BY J. A. Sacco

  2. Combination M-16 Rifles CD-ROM Players Society’s Trade-off BetweenM-16 Rifles and CD-ROM Players A 10.0 0 B 9.6 2 C 9.0 4 D 8.0 6 E 6.6 8 F 4.5 10 G 0 12

  3. Point R is unobtainable. R S Point S is inefficient. Society’s Trade-off BetweenM-16 Rifles and CD-ROM Players 12 10 8 How is this curve different from the previous curve? M-16 Rifles (billions of units per year) 6 4 2 0 2 4 6 8 10 12 CD-ROM Players (billions of units per year)

  4. A B C a b D c E d F e G f The Law ofIncreasing Relative Costs 12 Can we explain why the opportunity cost is not constant? 10 8 Opportunity cost in forgone M-16s M-16 Rifles (billions of units per year) 6 4 To obtain: 2 billion additional CD-ROM players 2 0 2 4 6 8 10 12 CD-ROM Players (billions of units per year)

  5. The Choices Society Faces • Law of Increasing Relative Costs • As society attempts to produce more of a good, the opportunity cost of additional units generally increases. WHY?

  6. The Choices Society Faces • Some resources better suited for certain products. • As you allocate more resources for that good, the production of that good will increase but at a greater cost for the good you are giving up because the resources are used in a less efficient manner. • The specializationof resources influence the shape of the production possibilities curve. • The more specialized the factor of production, the greater the opportunity cost and the curve in the PPC.

  7. Economic Growth and the Production Possibilities Curve • Economic Growth: How can you increase the production of both M-16s and CD-Roms? • Occurs over a period of time. • Is illustrated by an outward shift of the production possibilities curve.

  8. Economic Growth Allowsfor More of Everything M-16 Rifles (billions of units per year) CD-ROM Players (billions of units per year)

  9. The Trade-Off Betweenthe Present and the Future • The PPC can be used to illustrate the trade-off between present and future consumption. • Consumption Goods- The use of goods and services for personal satisfaction. • Capital Goods- Goods used to produce other goods.

  10. A B 4 5 Capital Goods and Growth • Consumer goods • Goods produced for personal satisfaction • Capital goods • Goods use to produce other goods Capital Goods per Year Consumption Goods per Year ($ trillions)

  11. Future growth as a result of A on the left-hand diagram A B 4 5 Capital Goods and Growth Capital Goods per Year Recreation per year Today Consumption Goods per Year ($ trillions) Food per Year

  12. Future growth as a result of C on the left-hand diagram C B 3 5 Capital Goods and Growth Capital Goods per Year Recreation per year A Today 4 Consumption Goods per Year ($ trillions) Food per Year

  13. Capital Goods and Growth • Observations • Forgo consumption goods to produce capital goods • Increase in capital goods stimulates economic growth • In the future the economic system can produce more consumer goods • An increase in capital goods will lead to a higher rate of economic growth in the future

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