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Society has unlimited wants but limited resources
The Economizing Problem
Scarcity
WE HAVE A PROBLEM!!
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The Production
Possibilities Curve
(PPC)
Using Economic Models
Step 1: Explain concept in words
Step 2: Use numbers as examples
Step 3: Generate graphs from numbers
Step 4: Make generalizations using graph
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3
TAKE YOUR CLICKER, PLEASE.
1. Brady
2. Sara Grace
3. Ansley
4. Cody
5. Ryan
6. Olivia
7. Caleb
8. Ellie
9. Dillon
10.Katie
11. Katelyn
12. Estie
13. Katherine
14. David
15. Tyler
CLICKER CHECK: ENTER AOR B
WHEN I TELL YOU TO!
A. THIS IS A
B. THIS IS B
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A. B.
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1. The line connecting A to G is known as
A. Supply Curve
B. Production
Possibilities Curve
C. Opportunity Cost
Graph
D. Marginal Cost Curve
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A. B. C. D.
0 0
1
14
2. Point G Represents:
A. Efficiency/Full
Employment
B. Growth
C. Impossibility
D. Inefficiency/
Unemployment
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3. Point H Represents:
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A. Efficiency/Full
employment
B. Growth
C. Impossiblity
D. Inefficiency/
Unemployment
4. Point B Represents:
A. Efficiency/Full
employment
B. Growth
C. Impossiblity
D. Inefficiency/
Unemployment
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A. B. C. D.
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0 0
1
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IMPOSSIBILITY
INEFFICIENCY/
UNEMPLOYMENT
What is the Production Possibilities Curve?
A production possibilities graph (PPG) is a model
that shows alternative ways that an economy
can use its scarce resources
This model graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency.
4 Key Assumptions
Only two goods can be produced
Full employment of resources
Fixed Resources (Ceteris Paribus)
Fixed Technology
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A B C D E f
14 12 9 5 0 0
0 2 4 6 8 10
Bikes
Computers
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis
Production Possibilities Table
Each point represents a specific
combination of goods that can be
produced given full employment of
resources.
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B
i
k
e
s
Computers
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12
10
8
6
4
2
0
0 2 4 6 8 10
A
B
C
D
E
G
Inefficient/
Unemployment
Impossible/Unattainable
(given current resources)
Efficient
Production Possibilities
How does the PPG graphically demonstrates scarcity, trade-
offs, opportunity costs, and efficiency?
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2 Bikes
2.The opportunity cost of
moving from b to d is
4.The opportunity cost of
moving from f to c is
3.The opportunity cost of
moving from d to b is
7 Bikes
4 Computer
0 Computers
5.What can you say about point G?
Unattainable
1. The opportunity cost of
moving from a to b is
Example:
Opportunity Cost
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5. Opportunity Cost is best defined as
A. The total value of all
foregone alternatives
when a choice is made.
B. The value of the next
best alternative when a
choice is made.
T
h
e
t
o
t
a
l v
a
lu
e
o
f a
ll fo
r
.. .
T
h
e
v
a
lu
e
o
f
t
h
e
n
e
x
t
b
e
s
t
...
67%
33%
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The Production Possibilities
Curve (or Frontier)
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PIZZA 0 1 2 3 4
CALZONES 4 3 2 1 0
List the Opportunity Cost of moving from a-b, b-
c, c-d, and d-e.
Constant Opportunity Cost- Resources are easily
adaptable for producing either good.
Result is a straight line PPC (not common)
Production Possibilities
A B C D E
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PIZZA 20 19 16 10 0
ROBOTS 0 1 2 3 4
List the Opportunity Cost of moving from a-b, b-
c, c-d, and d-e.
Law of Increasing Opportunity Cost-
As you produce more of any good, the
opportunity cost (forgone production of
another good) will increase.
Why? Resources are NOT easily adaptable to
producing both goods.
Result is a bowed out (Concave) PPC
A B C D E
Production Possibilities
6. A bowed-out PPC such as this, rather than a
straight one, is an indication of:
A. Increasing
opportunity cost
B. Centered Growth
C. Inefficiency
D. Scarce Resources
18 A. B. C. D.
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1
0
1
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Constant vs. Increasing Opportunity
Cost
Corn
Wheat
Cactus
Pineapples
Identify which product would have a straight line
PPC and which would be bowed out?
1 Bike
2.The PER UNIT opportunity
cost of moving from b to c is
4.The PER UNIT opportunity
cost of moving from d to e is
3.The PER UNIT opportunity
cost of moving from c to d is
1.5 (3/2) Bikes
2 Bikes
2.5 (5/2) Bikes
= Opportunity Cost
Units Gained
1. The PER UNIT opportunity cost
of moving from a to b is
Example:
PER UNIT Opportunity Cost
How much each marginal unit costs
NOTICE: Increasing Opportunity Costs
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The Production Possibilities
Curve and Efficiency
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Productive Efficiency-
Products are being produced in the least
costly way.
This is any point ON the Production
Possibilities Curve
Allocative Efficiency-
The products being produced are the
ones most desired by society.
This optimal point on the PPC depends
on the desires of society.
Two Types of Efficiency
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Productive and Allocative Efficiency
B
i
k
e
s
Computers
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12
10
8
6
4
2
0
0 2 4 6 8 10
A
B
C
D
F
E
Which points are productively efficient?
Which are allocatively efficient?
G
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Productively Efficient
combinations are A through D
Allocative Efficient
combinations depend on
the wants of society
(What if this represents a
country with no electricity?)
Why two types of efficiency?
Size 20 running
shoes
Size 10 running shoes
A
Is combination A efficient?
Yes and No. It is productively efficient but it is not the
combination society wants
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Shifting the Production
Possibilities Curve
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7. In a countrys economy, a curve shift from
PPC1 to PPC2 could result from:
A. 1. Population
growth
B. 2. Discovery of
new oil reserves
C. 3. Better
education
D. 4 All of the above
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A. B. C. D.
0
15
0 0
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4 Key Assumptions Revisited
Only two goods can be produced
Full employment of resources
Fixed Resources (4 Factors)
Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade
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Production Possibilities
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R
o
b
o
t
s
Pizzas
What happens if
there is an increase
in population?
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Production Possibilities
R
o
b
o
t
s
Pizzas
What happens if
there is an increase
in population?
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Production Possibilities
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R
o
b
o
t
s
Pizzas
What if there is a
technology improvement
in pizza ovens
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Production Possibilities
R
o
b
o
t
s
Pizzas
What if there is a
technology improvement
in pizza ovens
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Production Possibilities
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Panama Favors
Consumer Goods
Mexico Favors
Capital Goods
Consumer goods
C
a
p
i
t
a
l

G
o
o
d
s
Current
PPC
Future
PPC
Consumer goods
C
a
p
i
t
a
l

G
o
o
d
s
Future
PPC
Current
PPC
Capital Goods and Future Growth
Mexico Panama
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Countries that produce more capital goods will have
more growth in the future.
PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Robots (3)
1. New robot making technology
2. Decrease in the demand for pizza
3. Mad cow disease kills 85% of cows
Consumer goods and Capital Goods (4)
4. Destruction of power plants leads to severe
electricity shortage
5. Faster computer hardware
6. Many workers unemployed
7. Significant increases in education
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New robot making technology
Q
Q
R
o
b
o
t
s
Pizzas
Question #1
35
A shift only for Robots
Decrease in the demand for pizza
Q
Q
R
o
b
o
t
s
Pizzas
Question #2
36
The curve doesnt shift!
A change in demand
doesnt shift the curve
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Mad cow disease kills 85% of cows
Q
Q
R
o
b
o
t
s
Pizzas
Question #3
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A shift inward only for
Pizza
BP Oil Spill in the Gulf
Q
Q
C
a
p
i
t
a
l

G
o
o
d
s

(
G
u
n
s
)
Consumer Goods (Butter)
Question #4
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Decrease in resources
decrease production
possibilities for both
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Faster computer hardware
Q
Q
C
a
p
i
t
a
l

G
o
o
d
s

(
G
u
n
s
)
Consumer Goods (Butter)
Question #5
39
Quality of a resource
improves shifting the
curve outward
Many workers unemployed
Q
Q
C
a
p
i
t
a
l

G
o
o
d
s

(
G
u
n
s
)
Consumer Goods (Butter)
Question #6
40
The curve doesnt shift!
Unemployment is just a
point inside the curve
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Significant increases in education
Q
Q
C
a
p
i
t
a
l

G
o
o
d
s

(
G
u
n
s
)
Consumer Goods (Butter)
Question #7
41
The quality of labor is
improved. Curve shifts
outward.