Production Possibilities

1. Production Possibilities

2. When faced with SCARCITY of resources, decisions have to be made about how to use those resources Trade-offs Opportunity Costs

3. Trade-Offs This is the decision making process that is occurring in your mind right now! Am I going to pay attention to what Mr. Hayward is saying, or am I going to daydream? Am I going to come to class or go buy a lottery ticket? Am I going to stay in school or go find a full time job? Each and every decision you make has a cost!! Not necessarily a cost in dollar terms, but a cost in that you must give up something in order to get more of something else.

4. Opportunity Cost The �price you pay� for each decision you make is called the OPPORTUNITY COST. Opportunity cost is vital to the understanding of economics. �The amount of a product or service that must be forgone (given up) in order to obtain more of the next best alternative product or service�

5. Production Possibilities Frontier Used to illustrate: Productive Capacity Opportunity Costs Efficiency Productive Allocative Economic Growth/Decline Vital Link to Aggregate Supply (short/long run)

6. Production Possibilities FrontierIncreasing Opportunity Costs

7. Production Possibilities FrontierIncreasing Opportunity Costs The type of land resource suitable for growing Wheat is DIFFERENT than the land resource for growing Rice. If a society wants MORE Rice, then as you convert land suitable for growing Wheat (arable, relatively dry) so that you can grow Rice (wet, swampy) it will become MORE costly to do that, in terms of Wheat production We have INCREASING OPPORTUNITY COSTS of producing Rice in terms of Wheat

8. Production Possibilities Frontier Economy�s produce MORE that just Wheat and Rice. We produce LOTS of goods of many different types. We can broadly categorize goods into TWO categories Capital Goods and Consumer Goods

9. The best way to illustrate Trade-Offs and Opportunity Costs is to use a Production Possibilities Curve The PPC shows the relationship between two goods: 1. Capital Goods (Investment Goods) Goods that satisfy our wants INDIRECTLY and promote future growth or �happiness� � Delayed gratification. 2. Consumer Goods Goods that satisfy our wants DIRECTLY. Instant Gratification

10. Production Possibilities Frontier

11. Production Possibilities Curve (Frontier) The reason the PPC is bowed is because of INCREASING OPPORTUNITY COSTS. At Point �A� the economy gives up 10 capital goods in order to get 400 consumer goods. 400 Consumer goods = 10 Capital goods 1 Consumer good = 10 Capital goods/400 1 Consumer good = .025 Capital good

12. Production Possibilities Curve (Frontier) The reason the PPC is bowed is because of INCREASING OPPORTUNITY COSTS. At Point �B� the economy gives up 10 Capital goods in order to get 200 more Consumer goods. 200 Consumer goods = 10 Capital goods 1 Consumer good = 10 Capital goods/200 1 Consumer good = .05 Capital good

13. Production Possibilities Curve (Frontier) The bowed nature of the PPC is due to INCREASING OPPORTUNITY COSTS Not all resources are adaptable to alternative uses. Resources used for Capital Goods may not be suitable to make Consumer Goods (and Vice Versa) Marsh land suitable for growing rice could not easily be converted for use as a an airport. It would be much more costly than using farmland in Kansas.

14. Production Possibilities Curve (Frontier) Lets take a closer look at the PPC. What do the different points on the PPC represent?

15. Production Possibilities Curve (Frontier) Each point represents Productive Efficiency This means that this economy is allocating ALL of it productive resources in the least costly way

16. Production Possibilities Curve (Frontier) There are an infinite number of points on the PPC. Where a society decides to produce is called Allocative Efficiency This represents the combination of Capital and Consumer Goods most desired by the society

17. Production Possibilities Curve (Frontier) The WHOLE PPC represents �FULL PRODUCTION� Productive Efficiency Full-Employment of Resources

18. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? No! Often they operate inside their production possibilities

19. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? Point �E� represents a point inside the PPC. Notice that this point �E� represents a lower bundle of Capital and Consumer Goods

20. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? Point �E� represents a point inside the PPC. The area between point �E� and the PPC represents underutilization of resources or under-employment of resources or unemployment. The economy is being inefficient.

21. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? Point �E� represents a point inside the PPC. This economy could be doing better�

22. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? How about point �F�? Point F is outside our PPC It represents a combination of Capital and Consumer Goods that is currently not possible with this economies resources

23. Production Possibilities Curve (Frontier) Do economy�s always produce on the PPC? How about point �F�? Point F is outside our PPC This point is desirable (more �stuff�) but currently not attainable.

24. Production Possibilities Frontier

25. Production Possibilities CurveThe PPC shows ALL possible combinations of two goods that can be produced if ALL available resources are fully employed (used) with the best technology currently available

26. Production Possibilities CurveThe PPC shows ALL possible combinations of two goods that can be produced if ALL available resources are fully employed (used) with the best technology currently available