The Production Possibilities

Model

Lecture 3
Chapter 2 (1/1)
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 The Production Possibility
Model
A production possibility model conveys
the tradeoffs society faces.

Through specialization and trade, individuals,

firms, and countries can achieve greater
levels of output than they could otherwise
achieve.

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 Production Possibility Curve or
Frontier
 A production possibility curve (PPC) is a
curve measuring the maximum combination of
outputs that can be obtained from a given
number of inputs.

 It gives you a visual picture of the trade-off

embodied in a decision.

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Application: A Production Possibility Table for
Grades in Economics and History

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 Constant Opportunity Cost
Econ Grade
A PPC demonstrates:
100
16 hrs for Econ and
4 hrs for History
There is a limit to what
88 you can achieve, given
10 hrs for each existing institutions,
History and Econ
70
resources, and
technology.
PPC
Every choice you make
40 has an opportunity cost.
58 66 78 98 History
grade
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 Application 2: A Production Possibility Table for
Guns and Butter

% of Resources Number of % of Resources Pounds of Row

Devoted to Guns Guns Devoted to Butter
Production of
Butter

0 0 100 15 A
20 4 80 14 B
40 7 60 12 C
60 9 40 9 D
80 11 20 5 E
100 12 0 0 F

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 Increasing Opportunity Cost

Opportunity cost of choosing

guns over butter increases as
you increase the production of
guns.

Production possibilities curves

typically bow outward because
some resources are better
suited for certain kinds of goods
than other kinds of goods.

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 Increasing Opportunity Costs of the Tradeoff
The principle of increasing marginal opportunity cost tells us that
opportunity costs increase the more you concentrate on the activity.
Butter In order to get more of something, generally one must give up ever
increasing quantities of something else.

A
Slope is flat at A. This means there is a low
opportunity cost to produce more guns.

B Slope is steep at B. This means there is a

high opportunity cost to produce more
guns.
Guns 8
 Comparative Advantage
 The reason we must give up more and more
butter as we produce more guns is that some
resources are relatively better suited to
producing guns, while others are relatively better
suited to producing butter.
 A resource has a comparative advantage if it
is better suited to the production of one good
than to the production of another good.

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 Efficiency

Productive efficiency is achieving as

Butter much output as possible from a given
amount of inputs or resources.
A Inefficiency is getting less output
• from inputs that, if devoted to some
other activity, would produce more
• D output.
Points A and C are points of efficiency.
• Point D is unattainable with given
C
amounts of inputs.
• B
Point B is a point of inefficiency.
Guns
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 Efficiency and Technological Change

Neutral technological increase or Biased technological increase.

an increase in resources.
A A

B B
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End of Lecture 3

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