Section 3 Analyzing Production Possibilities. Section-3 KEY CONCEPTS Economic models — simplified...
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Chapter 1 The Economic Way of Thinking Section 3 Analyzing Production Possibilities
Transcript of Section 3 Analyzing Production Possibilities. Section-3 KEY CONCEPTS Economic models — simplified...
Chapter 1 The Economic Way of Thinking
Section 3Analyzing Production Possibilities
Section-3
KEY CONCEPTS• Economic models — simplified representations of economic forces• Production possibilities curve (PPC) is one model — maximum goods or services that can be produced from limited resources
— also called production possibilities frontier
Analyzing Production Possibilities
Graphing the Possibilities
KEY CONCEPTS• PPC based on assumptions that simplify economic interactions — resources are fixed
— all resources are fully employed — only two things can be produced — technology is fixed
Graphing the Possibilities
Production Possibilities Curve • PPC runs between extremes of producing only one item or the other• Data is plotted on a graph; lines joining points is PPC — shows maximum number of one item relative to other item• PPC shows opportunity cost of each choice
— more of one product means less of the other
Graphing the Possibilities
KEY CONCEPTS• Concepts revealed by PPC: — Efficiency — producing the maximum amount of goods and services possible — Underutilization — producing fewer goods and services than possible
Example: Efficiency and Underutilization • Each point on PPC represents efficiency — points inside curve mean underutilization; outside curve cannot be met• Law of increasing opportunity costs
— as production switches from one product to another, more resources needed to increase production of second product
Example: Increasing Opportunity Costs • Increase in opportunity cost — each new unit costs more than last one• Reasons for increasing cost of making more of one product — need new resources, machines, factories
— must retrain workers• Costs paid by making less and less of other product
Example: A Shift in the PPC • A country’s supply of resources changes over time — Example: U.S. in 1800s grew, gained resources, workers, new technology
— new resources mean new production possibilities beyond frontier• Increased production shown on PPC as shift of curve outward• Increase in total output called economic growth
What We Learn from PPCs
