The Production Possibilities Model in Economics
Resources and Production Possibilities Model
Chapter 1 Section 3
Mr. Henry
AP Economics
How a society decides what to
produce using their limited
resources because a society
cannot have everything
How a society determines how
to produce an item, whether
using people or machines, or
both
The society must decide who
will receive the things
produced
Scarcity:
Fundamental economic problem of meeting people’s
virtually unlimited wants w/ scarce resources
Within our society, what are examples of choices
society must make with its limited resources?
The factors of production, or
resources
required to produce
the goods & services we would like to have, are land,
capital, labor, and entrepreneurs.
Land:
natural resources or other “gifts of nature” not created by human effort
ie arable land, forests, mineral & oil deposits, and water resources
Capital:
sometimes called capital goods, includes all manufactured aids used in the production of
consumer goods and services (factories, storage, transportation, tools, and machinery)
Labor:
people with all their efforts, abilities, and skills
(both physical & mental – ie teacher, farmer, physicist)
Entrepreneurs:
risk-taking individual in search of profits
Combines resources of land, labor, and capital
What points on the graph represent
maximum
combinations of output if all resources are fully
employed?
What point on the graph would represent if
resources are idle, possibly due land/factory not
being used, a strike, or possibly a natural disaster?
Which point do you think represents production
cannot be reached due to no extra resources (such
as workers, supplies)?
What do you think has to happen if a country is
producing at point A but wants to achieve
production at point B?
The
production possibilities frontier
is a diagram
representing the maximum combinations of goods and/or
services an economy can produce when all productive
resources are fully employed.
In a
production possibilities table
, we see
the different combinations of two products
that can be produced within a specific set
of resources, assuming full employment.
At any point in time, a fully employed
economy must sacrifice some of one good
to obtain more of another good. Scarce
resources prohibit such an economy from
having more of both goods. Society must
choose among alternatives! Having more
of one thing means having less of
something else…so there is no such thing
as a free puff or free shed!
The data in the
production possibilities
table
are shown graphically as a
production
possibilities curve
.
Notice the vertical axis are the crab puffs
and the horizontal axis ar
e the storage
sheds.
This examples shows the law of increasing
opportunity costs. As the production of a
particular good increases (a shed), the
opportunity cost of producing an additional
unit increases.
The slope of a line is measured by calculating the change in the value measured on the vertical axis
divided by the change in the value measured on the horizontal axis. Another way of saying this is to divide
the rise by the run.
For the production possibilities curve to the right, this is the change in the quantity of crab puffs (rise)
divided by the change in the quantity of storage sheds (run).
Here is a handy formula for calculating the slope of the production possibilities curve.
Slope = rise/ run
(slope = change in crab puffs / change in sheds)
For example, the slope of the production possibilities curve between points I (8 sheds and 270 dozen crab
puffs) and J (9 sheds and 200 dozen crab puffs) is -70. The rise is a decrease of 70 and the run is an
increase of 1.
slope, I to J = change in crab puffs / change in sheds
= -70 / 1
= -70
270-200 70
----------- = -----
8-9 -1
Optimal Allocation
Remember Marginal Analysis compares marginal benefits
and marginal costs, meaning “extra” or “additional”. With
the production possibilities curve, we can use the data to
try and determine what specific quantities of resources
should be allocated to crab puffs and storage sheds in
order to maximize satisfaction.
Test
Preparation:
1)
Using the diagram above, which of the following might
have caused the outward movement of the production
possibility frontier?
A.
A decrease in the availability of fertile farmland
B.
A plague of destructive grasshoppers
C.
An increase in the productivity of the labor force
D.
A severe and long-lasting drought
E.
A decline in the rate of technological improvements
C - An increase in the productivity of the labor force
a.
Draw the production possibilities frontier for this economy
(put robots on the vertical axis)
b.
Indicate the area of unattainable production combinations
c.
Indicate the area of production combinations attainable with
some resources employed
d.
Calculate the per-unit opportunity cost for increasing pizza
production from zero to 100 units
What you give up
You have to give up 10 apples to get 4 oranges 10 5
Opp. Cost = -----------------------
- - - = - - - = 2.5
What you gained
4 2
So for
1 orange
you have to give up
2.5 apples
!
The resources and production possibilities model in economics explores scarcity, decision-making processes, factors of production, and the production possibilities frontier. It delves into how societies allocate limited resources to meet unlimited wants, and the balance between resources such as land, capital, labor, and entrepreneurship. The model illustrates trade-offs, opportunity costs, and constraints in production scenarios.
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Presentation Transcript
Resources and Production Possibilities Model Chapter 1 Section 3 Mr. Henry AP Economics
Scarcity:Fundamental economic problem of meeting peoples virtually unlimited wants w/ scarce resources How a society decides what to produce using their limited resources because a society cannot have everything How a society determines how to produce an item, whether using people or machines, or both The society must decide who will receive the things produced Within our society, what are examples of choices society must make with its limited resources?
The factors of production, or resources required to produce the goods & services we would like to have, are land, capital, labor, and entrepreneurs. Land: natural resources or other gifts of nature not created by human effort ie arable land, forests, mineral & oil deposits, and water resources Capital: sometimes called capital goods, includes all manufactured aids used in the production of consumer goods and services (factories, storage, transportation, tools, and machinery) Labor: people with all their efforts, abilities, and skills (both physical & mental ie teacher, farmer, physicist) Entrepreneurs: risk-taking individual in search of profits Combines resources of land, labor, and capital
The production possibilities frontier is a diagram representing the maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed. What points on the graph represent maximum combinations of output if all resources are fully employed? What point on the graph would represent if resources are idle, possibly due land/factory not being used, a strike, or possibly a natural disaster? Which point do you think represents production cannot be reached due to no extra resources (such as workers, supplies)? What do you think has to happen if a country is producing at point A but wants to achieve production at point B?
In a production possibilities table, we see the different combinations of two products that can be produced within a specific set of resources, assuming full employment. At any point in time, a fully employed economy must sacrifice some of one good to obtain more of another good. Scarce resources prohibit such an economy from having more of both goods. Society must choose among alternatives! Having more of one thing means having less of something else so there is no such thing as a free puff or free shed!
The data in the production possibilities table are shown graphically as a production possibilities curve. Notice the vertical axis are the crab puffs and the horizontal axis are the storage sheds. This examples shows the law of increasing opportunity costs. As the production of a particular good increases (a shed), the opportunity cost of producing an additional unit increases.
The slope of a line is measured by calculating the change in the value measured on the vertical axis divided by the change in the value measured on the horizontal axis. Another way of saying this is to divide the rise by the run. For the production possibilities curve to the right, this is the change in the quantity of crab puffs (rise) divided by the change in the quantity of storage sheds (run). Here is a handy formula for calculating the slope of the production possibilities curve. Slope = rise/ run (slope = change in crab puffs / change in sheds) For example, the slope of the production possibilities curve between points I (8 sheds and 270 dozen crab puffs) and J (9 sheds and 200 dozen crab puffs) is -70. The rise is a decrease of 70 and the run is an increase of 1. slope, I to J = change in crab puffs / change in sheds = -70 / 1 = -70 270-200 70 ----------- = ----- 8-9 -1
Optimal Allocation Remember Marginal Analysis compares marginal benefits and marginal costs, meaning extra or additional . With the production possibilities curve, we can use the data to try and determine what specific quantities of resources should be allocated to crab puffs and storage sheds in order to maximize satisfaction.
Test Preparation: 1) Using the diagram above, which of the following might have caused the outward movement of the production possibility frontier? A. A decrease in the availability of fertile farmland B. A plague of destructive grasshoppers C. An increase in the productivity of the labor force D. A severe and long-lasting drought E. A decline in the rate of technological improvements C - An increase in the productivity of the labor force
Robots Pizza 10 0 9 100 7 200 4 300 0 400 a. Draw the production possibilities frontier for this economy (put robots on the vertical axis) b. Indicate the area of unattainable production combinations c. Indicate the area of production combinations attainable with some resources employed d. Calculate the per-unit opportunity cost for increasing pizza production from zero to 100 units What you give up You have to give up 10 apples to get 4 oranges 10 5 Opp. Cost = ----------------------- What you gained So for 1 orange you have to give up 2.5 apples! - - - = - - - = 2.5 4 2
