PRODUCTION

POSSIBILITIES CURVE
4 Assumptions of the Model
1. Full Employment
2. Fixed Resources
3. Fixed Technology
4. Two Goods
 UNDER or BEYOND the Curve
◦ UNDER the curve is
attainable by the modeled
economy—but not efficient.
◦ Unemployment, idle resources*
◦ BEYOND the curve is
unattainable with current
resources.
 Constant Opportunity Cost

◦ Curve is a straight
line…constant slope.
Ex- red/blue
m&ms, squares
and triangles
Increasing Opportunity Cost
Shifts in the Production Possibility
Curve
◦Society can produce more output if:
◦ Technology is improved.
◦ More resources are discovered.
◦ Economic institutions get better at fulfilling our wants.
Economic GrowthProduction
Economic
The economy
growth
can results
now
is initially in
at point
A outward
an(20
produce shift
fishmore
and of
25of
everything.
the PPF
coconuts),
because
 move to point E (25
it can production
possibilities
fish are expanded.
and 30 coconuts).
Economic Growth
◦ Illustrated both in overall performance, or by sector.
◦ Overall = both intercepts increase
◦ Sector = one variable of production increases, one intercept increase

Result from new

technology,
improved labor, or
more capital
Shifts in the Production Possibility
Curve
Neutral Technological Change

Butter

C
A

0 B D Guns
Shifts in the Production Possibility
Curve
Biased Technological Change

Butter
C
B

0
A Guns
Fish and Fruit PPC
Fish
12

10

Fruit
5 10 15 20 25 30
 Combinations
◦ 9 fish and 13 fruit Attainable

◦ 10 fish and 13 fruit Unattainable

◦ 7 fish and 18 fruit Attainable

 Maximum Efficiency
◦ 11 fish and 0 fruit
Efficient

◦ 10 fish and 7 fruit Efficient

◦ 4 fish and 20 fruit NOT Efficient

Movies and Books PPC
Movies
1. What is the opportunity cost to moving
1000
from point A to point B?
2. What is the opportunity cost of moving
800
from point C to point B?
A 3. What does point Z represent?
600
B

400
C

200 Z
D

200 40 600 800 1000 Books (per month)

0
Production Possibilities Curve: Capital
Goods and Consumer Goods
Suppose
Supposeathere
Suppose massive
newisgovernment
anewmajor sourcescomes
into
of oil
power
and coal
technological andbreakthrough
are
forbids
found thewithin
usein of
the
automated
the economy, machinery
and thereand
consumer-goods industry, and the aremodern
production
major
new technological
techniques
technology innovations
is widelyin all
adopted.
industries.
in both industries.
Which curve
Which in
Which curve in the diagram would curve
the
diagram
in the diagram
represent would represent
the newwould represent
productionthe new
production
the new production
possibilities possibilities
curve? possibilities
curve?
curve?
Shifts along the Curve
1. What would cause the
production possibilities
curve to shift from the
original curve (XX’) to
the new curve (YY’)?

2. Why might a government

implement policy to
move the economy from
Point B to Point A?
◦ 1) Which of the following would not shift an economy's PPC?
a) An increase in population.
b) Doubling the amount of capital in the economy.
c) An increase in the money supply.
d) A technological advance.
2) Efficiency along the PPC implies,
a) Goods are produced quickly.
b) The state of technology is maximized.
c) In order to get more of a good, some of another must be given up.
d) Goods are distributed equitably.
3) A PPC shows,
a) The best combination of goods to produce.
b) The plans for increasing output in the short run.
c) What can be produced with various combinations of resources.
d) Resources are constrained by choices.
4) An economy has a constant cost PPC. What do you know about the slope?
a) A straight line.
b) Bowed in.
c) Bowed out.
d) Convex to origin.
◦ 5) What determines the opportunity cost along a PPC?

a) The kinds of goods being produced.

b) The slope of the PPC.
c) Choices made by the economy.
d) The area under the PPC.

6) Which of the following are assumptions underlying the PPC?

a) Only two goods are produced.

b) Technology, population, and capital are variable.
c) Prices determine the position on the PPC.
d) All the above.

7) What statement below implies that a PPC will be an increasing cost curve?

a) Resources are scarce.

b) Most resources are more productive in certain uses than others.
c) Underemployment of productive resources.
d) Diminishing marginal returns to scale.