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Production Possibilities Curve Analysis: Decision Making at the Margin

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25 diapositives · 354 Views · Aug 10, 2014

Understand Efficiency, Underutilization, and Law of Increasing Costs in Economics by analyzing Production Possibilities Curve through practical examples and application of marginal decision-making principles. Learn to graph data and interpret changes in production capabilities.

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  1. One-Question IQ Test There is a deaf-mute who wants to buy a toothbrush. By imitating the action of brushing one's teeth, he successfully expresses himself to the shopkeeper and the purchase is done. Now, if there is a blind man who wishes to buy a pair of sunglasses, how should he express himself? Essential Terms: Production Possibilities Curve, Production Possibilities Frontier, efficiency, underutilization, law of increasing costs

  2. Decisions at the Margin • “How much?” instead of “What? • Satisfaction with individual unit decreases as additional units are added • Productivity of individual unit decreases as additional units are added • Law of diminishing returns

  3. Underutilization

  4. Law of Increasing Costs =10 =10 =10 ____ 30 =10 =10 =10 ____ 30

  5. =10 =10 =10 =5 ____ 35 =10 =10 ____ 20

  6. =5 =10 =10 =10 ____ 35 =10 =10 ____ 20

  7. Graph the following Production Possibilities Curve:

  8. Now, insert a point showing underutilization.

  9. * Underutilization

  10. After technological improvements, here is the new Production Possibilities Data. Graph this on the old chart.

  11. Use the data above to construct a Production Possibilities Curve. Be sure to label your graph. • Mattel produces only 3 million Kens and 5 million Barbies. Plot this point on the graph above. • What does this new point represent (in relation to the original line.)

  12. The next year, Mattel invests in new equipment. The table below represents the new combinations of Kens and Barbies that it could produce. Use this data to construct a new Production Possibilities Curve on the same grid. What does this new line represent (in relation to the old)