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Production Possibilities Curve

Economic Growth and Production

The greatest powerpoint about


production possibilities ever.
We are in a mixed market
economy
Therefore, we have to make choices
We must choose how to spend our time, energy,
and capital
We must make a choice on what to study, what
to eat, when to work
Economics or Calculus
Expensive Food or Cheap Food
Friday night party or Friday night working
Scarcity, Choice,
and Opportunity Cost
Opportunity Cost
The highest-valued, next-best alternative that
must be sacrificed to obtain something or to
satisfy a want
Scarcity, Choice,
and Opportunity Cost (cont'd)
Questions
What is the opportunity cost of attending this
economics class?
What is the opportunity cost of attending a
concert by your favorite band?
What is the opportunity cost of increasing
research for an AIDS vaccine?
Scarcity, Choice,
and Opportunity Cost (cont'd)
In economics, cost is always
a forgone opportunity.
Scarcity, Choice,
and Opportunity Cost (cont'd)
Limited Resources & Unlimited Wants

Scarcity

Choices

Opportunity Cost
Scarcity, Choice, and Opportunity Cost
Opportunity cost
and a national monument
Allocating land between public and
private use
The trade-off between the use of
land for recreation or for coal
Question
What does the market value of coal
under the National Monument tell
us about the perceived social value
of the monument?
How to represent opportunity cost?
The production
possibilities curve
(PPC) represents all
possible maximum
combinations of total
output that could
be produced.
PPC - Studying
The Choices Society Faces (cont'd)
Production possibilities assumptions
Resources are fully employed
Production takes place over a specific
time period
Resources are fixed for the time period
Technology does not change over the
time period
The Choices Society Faces (cont'd)
Efficiency
A point along the line when everyone is employed
and all resources are used correctly.
Production
Possibilities Curve (PPC)
What would happen to the production
possibilities curve if you spent more
time studying?
Lets say instead of 12, you had 20 hours to
study
What would happen to your
potential grades?
What if the subjects overlapped like English
and History or Speech
Economic Growth and the Production
Possibilities Curve
Economic growth
Increases the production possibilities
of the two goods
Occurs over the long run
Is illustrated by an outward shift
of the production possibilities curve
2-15

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Pearson Addison Wesley.
All rights reserved.

Figure 2-4 Economic Growth Allows


for More of Everything
2-16

Copyright 2008
Pearson Addison Wesley.
All rights reserved.

Economic Growth
When the curve
moves out we have
economic growth,
which is caused by:
New Technology
More Labor
More Supply a
new supply of
gasoline found
The Choices Society Faces
PPC is used to demonstrate
related concepts of scarcity,
choice, and trade-offs
At the individual level
At the societal level
Guns vs. Butter
Guns vs. Butter
Minister of Propaganda Joseph Goebbels stated:
"We can do without butter, but, despite all our
love of peace, not without arms. One cannot
shoot with butter, but with guns." Sometime in
the summer of the same year, Herman Gring
announced in a speech, "Guns will make us
powerful; butter will only make us fat."
Another use of the term was Margaret Thatcher's
reference in a speech that, "The Soviets put guns
over butter, but we put almost everything over
guns."
2-22

Copyright 2008
Pearson Addison Wesley.
All rights reserved.

The Trade-Off Between


the Present and the Future
PPC
Can be used to illustrate the trade-off between
present and future consumption

Consumption
The use of goods and services for personal
satisfaction
2-23

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Pearson Addison Wesley.
All rights reserved.

Figure 2-5
Capital Goods and Growth
Consumer goods
Goods produced for personal
satisfaction
Capital goods
Goods used to produce other
goods
2-24

Copyright 2008
Pearson Addison Wesley.
All rights reserved.

We can move along the PPC, or have


the PPC move out
2-25

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Pearson Addison Wesley.
All rights reserved.

Specialization and
Greater Productivity
Specialization
Organization of economic activity among different
individuals and regions
Leads to greater productivity
2-26

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Pearson Addison Wesley.
All rights reserved.

The Choices Society Faces (cont'd)


In general, the more specialized the resources,
the more bowed the PPC
2-27

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Pearson Addison Wesley.
All rights reserved.

Specialization and
Greater Productivity (cont'd)
Absolute Advantage
The ability to produce more units of a good or
service using a given quantity of labor or resource
inputs
Equivalently, the ability to produce the same
quantity of a good or service using fewer units of
labor or resource inputs
2-28

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Pearson Addison Wesley.
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Specialization and
Greater Productivity (cont'd)
Comparative Advantage
The ability to produce a good or service at a lower
opportunity cost
Is always a relative concept
Consider Michael Jordan and some
random minor league player
MJ has absolute advantage in basketball, and
maybe baseball, but the minor league player has
a comparative advantage in baseball
Country A has an absolute
advantage in the production
of both maize and wheat. At
all points its production
possibility curve lies to the
right of that of Country B.
Now consider the opportunity
cost of Country B producing
one more unit of wheat. Two
units of maize have been
foregone. When Country B
produces one more unit of
wheat only half a unit of maize In the above case Country
is foregone. Fewer resources
A should produce maize
are foregone if Country B
and Country B wheat.
specializes in the production
of wheat. The surpluses produce
should then be traded.
2-31

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Pearson Addison Wesley.
All rights reserved.

Comparative Advantage
and Trade Among Nations (cont'd)
When nations specialize where they have a
comparative advantage and then trade with the
rest of the world
Economic efficiency improves
Output increases
Average standard of living rises
2-32

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Pearson Addison Wesley.
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Division of Labor
Rational individuals choose
their comparative advantage
and specialize.
Specialization leads to division
of labor.
Theorized by Adam Smith in
Wealth of Nations
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Pearson Addison Wesley.
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Division of Labor (cont'd)


Division of Labor
Assigning different workers different tasks to produce
a good or service
Organizing a division of labor within a firm to increase
output

Examples
Automobile production
Hospital operating room