Production Possibilities Curve and Economic Growth
Production Possibilities Curve
•
The Production Possibilities
Curve illustrates the trade-offs
facing an economy producing
two goods.
•
The
production possibilities
frontier
(the line) shows
all the
possible combinations
of the
two products
using all the
available resources
.
•
Since we are using all available
resources,
increasing the
production of one of the goods
means decreasing the
production of the other good
(illustrates the idea of trade-
offs).
Efficiency
•
Production is efficient if
there is not a way to make
some people better off
without making other people
worse off.
•
All points
on the frontier
are
efficient
.
•
Any point
inside of the
frontier
is
inefficient
and
shows an
underutilization
of
resources. It represents
unemployment
within a
business or within a country.
•
Production is
allocatively
efficient
if the mix of goods is
what people want to
consume
.
Opportunity Cost
•
As production of one
good is increased,
production of the second
must be decreased
•
This loss of production is
the
opportunity cost
:
what must be given up.
•
If the cost is
constant
the
production possibilities
curve will be a straight
line.
Increasing Opportunity Cost
•
However, economists
believe that
opportunity
costs are not constant
along
the frontier.
•
As resources are moved
from the production of
Smarties to Dum-Dums,
increasingly larger
amounts
of Smarties must be given
up to get
decreasingly
smaller
amounts of Dum-
Dums.
•
This happens because
resources are not equally
suited to the production of
both goods
.
•
This is known as the
Law of
Increasing Costs
.
Economic Growth
•
Production outside of the
frontier is not possible
with
current available resources
.
•
However, if there is an
increase in
land, labor or
capital
OR
technology
then
the
frontier will shift
outwards.
•
A shift out
means that more
of both products can be
produced.
•
This shift represents
economic growth
The Production Possibilities Curve illustrates trade-offs in an economy producing two goods, showing possible combinations using available resources. Efficiency on the curve means no way to make some better off without others worse off. Opportunity cost is the given-up production when increasing one good at the expense of another. Economists argue that Opportunity Costs are not constant, leading to the Law of Increasing Costs. Economic Growth occurs with resource or technology increases, shifting the curve outward for increased production.
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Presentation Transcript
Production Possibilities Curve The Production Possibilities Curve illustrates the trade-offs facing an economy producing two goods. The production possibilities frontier (the line) shows all the possible combinations of the two products using all the available resources. Since we are using all available resources, increasing the production of one of the goods means decreasing the production of the other good (illustrates the idea of trade- offs).
Efficiency Production is efficient if there is not a way to make some people better off without making other people worse off. All points on the frontier are efficient. Any point inside of the frontier is inefficient and shows an underutilization of resources. It represents unemployment within a business or within a country. Production is allocatively efficient if the mix of goods is what people want to consume.
Opportunity Cost As production of one good is increased, production of the second must be decreased This loss of production is the opportunity cost: what must be given up. If the cost is constant the production possibilities curve will be a straight line.
Increasing Opportunity Cost However, economists believe that opportunity costs are not constant along the frontier. As resources are moved from the production of Smarties to Dum-Dums, increasingly larger amounts of Smarties must be given up to get decreasingly smaller amounts of Dum- Dums. This happens because resources are not equally suited to the production of both goods. This is known as the Law of Increasing Costs.
Economic Growth Production outside of the frontier is not possible with current available resources. However, if there is an increase in land, labor or capital OR technology then the frontier will shift outwards. A shift out means that more of both products can be produced. This shift represents economic growth
