Economic Challenges Facing Countries & Business

PPC:

Production Possibilities Curve

Economic System: A set of rules by which a nationdecides how to distribute its resourcesto satisfy its people’s needs and wants.

3 Basic Questions for Goods & Services: 1. Which goods and services will be produced? 2. How will these goods and services be

produced? 3. How will these goods and services be

distributed?

Factors of Production

Economic Resources: Resources that could be used

to produce or create goods or services. When economic resources

are actually used to produce goods or services, they become Factors of Production.

4 Factors of Production: 1. Natural Resources: 2. Human Resources 3. Capital Resources 4. Entrepreneurial

Resources

Natural Resources

1.) Natural Resources: Things that come from the air, water, or earth. 2 Types of Natural Resources: A. Nonrenewable Resources: Cannot be replaced or renewed – coal, oil, and

other minerals. B. Renewable Resources: Can be replenished – water and plants

Human Resources 2.) Human Resources: People who contribute physical and

mental energy to the production process.

Human Resources are also called Labor or Employees.

Experts tell us that Human Resources are the most important resource a business can have. If treated badly, they will leave the business and then the business cannot function.

Treating your employees fairly is critical to the success of your business.

Capital Resources 3.) Capital Resources: All the other items other than natural

resources that are used to produce goods and services .

This includes buildings, machines, equipment, and tools.

Capital Resources do not directly satisfy our wants but are still useful and necessary for production to occur.

Money is not technically considered a CapitalResource since it does not directly produce goods and services.

Entrepreneurial Resources 4.)Entrepreneurship: The initiative to

combine natural, human, and capital resources to produce goods or services.

Entrepreneurs are the people who recognize a new want or need and find ways to combine resources to fulfill that want or need

What does scarcity force countries to do? Scarcity causes countries to answer the 3 basic

economic questions: 1. Which goods & services will be produced? 2. How will goods and services be produced?

3. How will goods and services be distributed? Since resources are limited, a country cannot make

every good in the quantity its people would like as inexpensively as they may desire.

Population and Production: Population: The number of people living in an area, usually

a country. The more people a nation has, the tougher the

production decisions become.

Effects of Population Growth : 1. As population increases, the number of needs

and wants that must be fulfilled also increases. 2. As population increases, the available labor

supply increases.

Making Decisions About Production

The resources used for one purpose cannot also be used for something else

Example: Land used to farm cannot also be used to

build a factory.

To produce one thing we must give up another. What is this called?

This foregone choice is called the Opportunity Cost.

Production Possibility Curve

Candy Bars

This graph showsthe number of candy bars and gumballs a candy company might produce.

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• A Production Possibility Curve/Graph is used to measure the trade-off a country or business makes when deciding to produce one product over another.

• A production possibility curve is a graph which shows the different production combinations that are possible for two goods or services.

Production Possibilities Frontier

Model used to illustrate opportunity costs

It is the line that shows maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed

Any spot on that line represents a point at which all the resources are being used to produce a max combination of two products

Represents an economy working at its most efficient level of production

Any point inside the line indicates an underutilization of resources

Guns v. Butter

A – 100 Butter, 30 Guns

B – 50 Butter, 120 Guns

C – Overuse of resources (temporary)

D – Resources not fully employed

This graph shows the number of guns and butter a country can produce:

Production Possibility Curve

25 20 15 10 5 0 1 2 3 4 5

Candy Bars The x-axis is the horizontal axis. It represents one good, candy bars. The y-axis is the vertical axis. It represents another good, gumballs.

Let’s look a little closer at how this works.

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Production Possibility Curve

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Candy Bars Look at the red dots.What is the maximum number of Gumballs which can be produced? 25

What is the maximum number of candy bars which can be produced? 5

Can we produce the maximum number of both goods? NO

 

           

         

         

         

         

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Production Possibility Curve

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Why can’t we producethe maximum of both goods? If the maximum amount of one

good is produced, then none of the other good can be produced.Look at the green dot

If 5 candy bars are made, then 0 gumballs can be made. If 25 gumballs are made, then 0 candy bars can be made.

 

           

         

         

         

         

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Production Possibility Curve

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Candy Bars WHAT CAN WE MAKE?

We can make any combination of goods which lies along the blue sloping line on the graph.

We look for common points along the line for both products.

Let’s look at some possibilities.

 

           

         

         

         

         

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Production Possibility Curve

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Candy Bars IF WE PRODUCE 15 GUMBALLS,

HOW MANY CANDY BARS CAN WE MAKE? ______ 2

We go up the y-axis to 15 gumballs and across to the line. The red dot shows that if we make 15 gumballs then we only have the resources left to make 2 candy bars.

 

           

         

         

         

         

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Candy Bars What if we think 2 candy bars is not enough?

WHAT IF WE DECIDE TO PRODUCE 4 CANDY BARS INSTEAD OF 2?

Now, how many gumballs can we make? 5

We go across the x-axis to 4 candy bars and up to the line. The red dot shows that we can make only 5 gumballs

 

           

         

         

         

         

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Production Possibility Curve

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Candy Bars How many gumballs do we lose if we make 4 candy

bars instead of 2? 10Look at the red dots

AT, 2 candy bars, we make 15 gumballsAT, 4 candy bars, we make 5 gumballs

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WE lose 10 gumballs: law of increasing costs (opportunity cost increases)

 

           

         

         

         

         

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How do we decide which is better, 2 or 4 candy bars?

How do we decide which is better, 2 or 4 candy bars?

TRICK QUESTION!The answer is……

IT DEPENDSWe can’t, not just yet.We would need more information.

It’s the same way for companies and countries.

They will look at many factors such as:

• the cost of the ingredients for each product,• how many of each item they can sell,• how much they can charge for each product,• how many workers or machines are needed

for each.• Business can be very complex.

Using the Production Possibilities Frontier

The production possibilities frontier (PPF) is a useful tool for understanding economic choices made by societies. It is also a useful model for understanding economic growth.

The PPF is a graph that shows how a country might allocate scarce resources in its production of goods and services. For simplicity, the model shows the production of two types of goods and services—defense goods (military goods and services produced for national defense; for example, tanks, satellites, and warplanes)and civilian goods (goods and services produced for consumption for nonmilitary purposes; for example, cars, education, and medical care)—we might draw a graph that looks like Figure 1.

Frontier:

Represents the max quantity of defense goods and civilian goods the economy can produce with its currently available resources.

Economic resources: • Land (natural resources)• Labor (workers)• Capital (goods used to produce other goods and services)

For Example:

• This society might choose to allocate resources in a combination reflected by point “B”

• Which shows a large quantity of defense goods produced (11 units)

• And a much smaller quantity of civilian goods produced (5units)

• This society would enjoy a greater sense of security but have fewer goods and services available for consumption by its civilian population

Or, The society might choose to

produce the combination reflected by point “D”

Which shows a larger quantity of civilian goods (11units)

And a much smaller quantity of defense goods (5 units)

Now, the society has chosen to forgo some national security in exchange for a higher consumption of civilian goods.

In both cases, when society is producing on the “frontier”!

It indicates that the society is using all its available resources and producing at an efficient level

Alternatively, the society might choose point “A”• This indicates a much smaller production of both defense goods

and civilian goods (5 units each)• The choice of a point inside the PPF shows the resources in the

economy are underutilized• Society is using fewer resources than optimal

• This might occur during an economic recession when some factories sit idle

• And/or some workers are unemployed

PPF is useful to visualize the economic concepts of - Scarcity and Opportunity cost

• Imagine a society that chooses point “D” as its current allocation of resources between defense goods and civilian goods

• If this society decides more security is needed (greater spending on defense goods by moving to point B)

• Then, this choice would require giving up 6 units of civilian goods.

• Why? • Because of Scarcity • The resources used to produce

defense goods are not available for the production of civilian goods

• The civilian goods given up as a result of this choice constitute an opportunity cost –

• The value of the next best alternative when a decision is made; it’s what is given up

Economic Growth means more of both goods:

• In the model that we’ve been looking at, we learned that the frontier represents maximum production with current resources.

• In this case, when we are looking at an economy’s production of goods and services – production point “E” is not possible with current resources

The frontier itself can shift outward (to the right and up)

This shift represents economic growth that creates• Rising opportunities,• Living standards• And incomes for people

The shift can be a result from increases in inputs and outputs

The increase in inputs is simply an increase in the # of available resources

More land (natural resources)

Labor Or, capital Outputs - Sustainable

long-run growth is the result of better use of existing land, labor and capital through technological progress and innovation

The outward shift of the frontier made possible by economic growth makes production at point “E” possible

During recessions, the economy may operate with an above-average number of unemployed people.

That is, when the economy is operating below its productive capacity; this is indicated by a point inside the PPF, such as point “A”

Monetary policies leading to lower interest rates or fiscal policies—such as tax cuts or increases in government spending—designed to push the economy back toward the PPF might be used in recessions to move the economy back toward its potential, such as point “B.”

This move toward the economy’s potential is often referred to as economic expansion.

The Difference between Economic Expansion and Long-run Economic Growth:

Economic expansion moves production capacity toward the previously established PPF

Economic growth shifts the PPF outward

This makes the production at point “C” possible

Lower interest rates, tax cuts, and increases in government spending can be used to support economic expansion

But, Economic Growth that shifts the PPF is a result of increases in resources and productivity and is supported by economic institutions that promote growth