PRODUCTION POSSIBILITIES CURVES

PRODUCTION POSSIBILITIES Production Possibilities Curve- (graph)

shows alternative ways to use an economy’s productive resources.

The axes of the graph can show categories of goods and services. (farm goods and factory goods)

The axes can also show any pair of specific goods or services. (hamburgers and hotdogs).

0 5 10 15 20 250

5

10

15

20

25

Production Possibilities Curve

(15,0)All Shoes, No Watermelons

Watermelons (in millions of tons)

Shoes

(in m

illio

ns

of

pair

s)

15 20 25 30 35 40 450

5

10

15

20

25

Production Possibilities Curve

(21,0)

All Watermelons, No Shoes

Watermelons (in millions of tons)

Shoes

(in m

illio

ns

of

pair

s)

Watermelons (Millions of

Tons)

Shoes (Millions of Pairs)

0 158 14

14 1218 920 521 0

0 5 10 15 20 250

5

10

15

20

25

Production Possibilities Curve

A. (15,0)B. (8,14) C. (14,12)

D. (18,9)

E. (20,5)

F. (21,0)

Production of Watermelons and Shoes

Watermelons (in millions of tons)

Shoes

(in m

illio

ns

of

pair

s)

PRODUCTION POSSIBILITIES CURVE Production Possibilities Frontier- The line

we draw that shows combinations of the production of our goods or services.

ANY POINT ON THAT LINE REPRESENTS A POINT AT WHICH THE COMPANY IS USING ALL OF ITS RESOURCES TO PRODUCE A MAXIMUM COMBINATION OF THOSE TWO PRODUCTS.

Represents an economy working at its most efficient level of production. Efficiency- using resources in such a way as to

maximize the production of goods and services.

Moving along the line represents a trade off between the two goods or services.

UNDERUTILIZATION

0 5 10 15 20 250

5

10

15

20

25

Production Possibilities Curve

Watermelons (in millions of tons)

Shoes

(in m

illio

ns

of

pair

s)

Underutilization

Future Production Possibilities Frontier

Underutilization- using fewer resources than the economy is capable of using.

PRODUCTION POSSIBILITIES FRONTIER New Technology, more immigrants, more

labor, economy growing, or the supply of labor or capital increases—shifts the frontier to the right.

Population ages, lose land in war, people become unhealthy or uneducated, or a decrease in capital or labor would shift the curve left.

PRODUCTION POSSIBILITIES Cost: The alternative we give up when we

choose one option over the other. (OPPORTUNITY COST)

Law of Increasing Costs: As the production switches from one item to another (shoes to watermelons), more and more resources are necessary to increase production of the second item (watermelons). Therefore… the opportunity cost increases! WHY?!

Countries must look at their resources and technology to decide what to produce.