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Production Possibilities Curve

The concept of opportunity cost and associated tradeoffs may be illustrated with a
picture
...
It is a model of a macro
economy used to analyze the production decisions in the economy and the problem of
scarcity
...
It
can do so only with growth
...

Accumulation of capital
2
...

Increase in population – immigrants, birth rates increase
4
...
Decrease in population –disease, catastrophe, war, birth rates decline
2
...
Decrease in production due to aging population, more uneducated population,
less healthy population

Four Assumptions
1
...
This
is a simplifying assumption that makes it easy to display production alternatives
using graphs
...

2
...
This is a reasonable assumption, but it can be relaxed
to analyze the consequences of changes in these resources
...
Fixed Technology: The information and knowledge that society has about the
production of goods and services is fixed
...

4
...
That
is, the maximum possible production is obtained from the resource inputs
...
Full employment
o Points beyond the PPC (Point B) are not attainable given the resource
constraint – only after economic growth
o Points below the PPF (Point A) are feasible, but inefficient
...
Slope of the line: Opportunity cost is indicated by the negative slope of the production
possibilities curve (or frontier)
...
This production reduction is opportunity cost
...

As the production of one good goes up, the rate of the other decreases by an increasing
rate
...
Rarely there might be a straight line
...
As production for one product
increases, the other decreases at the same rate
...
Examples:
black shoes vs
...
hamburger pizza; hours of study vs
...
Law of Increasing Costs does not apply to straight lines
...

August 2005 -- Hurricane Katrina hit Florida and then slammed into the Gulf Coast,
flooding New Orleans and sending a 28-foot-high (8
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$45 billion
...
$22
...

January 1994 -- The Northridge, California earthquake, measuring 6
...
$18
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September 2004 -- Hurricane Ivan rips through the Caribbean, battering oil rigs in the
Gulf of Mexico and then hitting Florida, one of four hurricanes to crash into the state that
year
...
7 billion
...
$10 billion
...

Eight of the 11 most expensive disasters in history, at least in terms of insured losses,
have occurred along the U
...
Gulf Coast in the past four years
...
Jackie land is known for the production of Cupcakes and Robots
...
Put cupcakes on the Y
b) Indicate on the graph with Point K where inefficient is
...


2
...

a
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List reasons for growth:

3
...

a
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List reasons for decline:

4
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It has to make choices
...
It has to decide how many
popcorn stands and how many cotton candy stands to have scattered around the zoo
...
Now the committee has to
decide what combination is right
...
Use the table below and graph a Production Possibilities curve on the graph
below:
Popcorn or Cotton Candy
Popcorn
0
1
2
3
4

Cotton Candy
10
9
7
4
0

Popcorn

Cotton candy

b
...
Call it Point A, Next, label a
point of efficiency
...
Last, label a point that is now unattainable
...

c
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What is the marginal cost of 3 popcorn stands?
e
...
Plot the following combinations of good X and good Y on the graph below
...

Good X

Good Y

37
34
30
28
20
10
0

0
10
17
20
29
36
40

Good Y

Good X

Answer the following questions:
a
...

b
...

c
...

d
...
Plot the following combinations of bats and rackets produced by the Athletic
Country on the graph below
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Bats

Rackets

0
100
200
300
400
500

420
400
360
300
200
0

Rackets

Bats

Answer the following questions:
a
...
If Athletic Country currently produces 300 bats and 300 rackets, what is
the opportunity cost of an additional 100 bats?
c
...
Suppose the Athletic Country is producing 200 bats and 200 rackets
...
Is the production of 200 bats and 200 rackets efficient? Explain
...
The above production possibilities frontier shows the available tradeoffs
between consumption goods and capital goods
...




Investment: This is indicated by a tradeoff between the production of consumer
goods and capital goods
...


Answer the following questions
...
Suppose Party Country chooses to produce at point A while Sleepy Country
chooses to produce at Point B
...
In this model, what is the opportunity of future growth?
c
...
Would the frontier for Sleepy
Country shift more or less than that for Party Country? Why?
Consumption
Goods

Capital Goods

d
...

Consumption
Goods

Capital Goods

e
...
Directions: Circle Micro or Macro
...
For Microeconomic
situations, use the two trade-offs
...
Before
2
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Following a period of high
unemployment, the U
...

enters the fighting of
World War II
...


Following a period of fullemployment, the U
...

accelerated the war in
Vietnam and the War on
Poverty
...


Following a period of
discrimination against
women and minorities, the
U
...
legally ended such
discrimination in the work
place
...


Following a period that
allowed lumber companies
to log in publicly-owned land,
a law was passed to protect
the spotted owl’s habitat that
ended logging in the area
...


Before the Gulf War, Iraq
was a full-employment of
their resources, but during
the war many of their facilities
were bombed and people
were killed
...
Before
2
...
Before
2
...
Before
2
...
Before
2
...


Although Americans have
been at full-employment for
almost a decade, our savings
rate has dropped from 6% to
0%
...


Following a period of fullemployment of their resources,
Ethiopia experienced drought
and over farming of the land
...


Following a period of mild
recession, new developments
in computer technology
caused many businesses to
invest in new computer
systems
...


Following a period of fullemployment, credit card
companies like MasterCard
extended lots of easy credit
to American buyers
...
Before
2
...
Before
2
...
Before
2
...
Before
2
...


k
...
S
...

(Micro or Macro?)

The Big Blue Computer Co
...

A new technique allows them to
produce personal computers
more efficiently
...
Before
2
...
Before
2
...


m
...

As a result of a very cold winter,
Exxon increases its production
of heating oil
...

(Micro or Macro?)
You can use your time after
graduation to either work
or go to college
...
You will fully use
your time
...
Before
2
...
Before
2
...
Each can be used more than once and each
description has more than one answer
...


__________1
...
Productive efficiency
__________3
...
Technological advances in the production of both
__________5
...
An impossible production mix

Divide the class into groups and assign each group one of these scenarios
...

Version A
Using economic analysis and the Production Possibilities Curve, explain what happened
to the production of consumer goods and capital goods in 1968 when the U
...
increased
involvement in Vietnam
...

Version B
Using economic analysis and the Production Possibilities Curve, explain what happened
to the production of consumer goods and capital goods in 1929 when the U
...
fell deeply
into the Great Depression
...

Version C
Using economic analysis and the Production Possibilities Curve, explain what happened
to the production of consumer goods and capital goods in 1941 when the U
...
entered
World War II
...

Version D
Using economic analysis and the Production Possibilities Curve, explain what happened
to the production of consumer goods and capital goods in Somalia when that country
became involved in a destructive Civil War
...

Version E
Using economic analysis and the Production Possibilities Curve, explain what happened
to the production of consumer goods and capital goods in Mexico two years ago when
economic chaos occurred and many workers lost their jobs and factories were closed
...
Explain the short run and long
run consequences
...
S
...

Prior to that time, we had been at full-employment, full production
...
S
...
Prior to that time the
U
...
had been in a recession and had been suffering from unemployment

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