1.3 - Production Possibilities Curve

Monday, August 21
 Happy Monday 
 Please get out your notes and something to write
with.
 HW:
 1. Review Chapter 1 and your notes – quiz tomorrow!
 2. On your own, read and take notes from the
“Economic System” PPT posted online. This won’t be
covered on the quiz but will be covered on your unit
test.
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Unit 1: Basic
Economic Concepts
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ACDC Leadership 2015
TINSTAAFL
 Define Free…
 There Is No Such Thing As A Free
Lunch- economic concept that states
that nothing is truly without a cost
A government cannot spend money and
provide goods and services at no ones
expense.
https://www.youtube.com/watch?v=ie1XGTYueHw
The 4 Factors of
Production
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Three Basic Questions
Every society must decide:
What to produce?
How to produce?
For whom to produce?
 Depending on which
system a nation utilizes,
these questions may be
answered by the
government or by
individuals.
 Goods and Services.
 4 Categories:
1. Consumption – HDTV, movies,
Coke, haircuts
2. Capital – farm tractor,
factory
3. Government – weapons
systems, police and fire,
public schools
4. Exports – produced in one
country, sold in another.
The Four Factors of Production (“How)
ALL resources can be classified as one of the
following four factors of production:
1. Land -All natural resources that are used to
produce goods and services. (Ex: water, sun,
plants, animals)
2. Labor -Any effort a person devotes to a task for
which that person is paid. (Ex: manual laborers,
lawyers, doctors, teachers, waiters, etc.)
3. Capital -
Physical Capital- Any human-made resource that is used to create other goods
and services ( Ex: tools, tractors, machinery, buildings, factories, etc.)
Human Capital- Any skills or knowledge gained by a worker through education
and experience
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The Four Factors of
Production
4. Entrepreneurship -
ambitious leaders that combine the
other factors of production to create
goods and services.
Examples-Henry Ford, Bill Gates,
Inventors, Store Owners, etc.
Entrepreneurs:
1. Take The Initiative
2. Innovate
3. Act as the Risk Bearers
PROFIT
So they can obtain _________.
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Profit = Revenue - Costs
REVIEW
1. Explain relationship between scarcity and choices
2. Differentiate between positive & normative
3. Differentiate between price and cost.
4. Differentiate between consumer and capital goods
5. Give examples of each of the 4 Factors of
Production
6. Define human capital
7. Define tradeoffs
8. Define opportunity cost
9. What is TINSTAAFL
10. Name 10 different teachers at CHS.
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WE HAVE A PROBLEM!!
The Economizing Problem…
Scarcity
Society has unlimited wants but limited resources
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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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What is the Production Possibilities Curve?
• A production possibilities curve (or frontier) 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 13
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Production “Possibilities” Table
A B C D E F
Bikes 14 12 9 5 0 0
Computers 0 2 4 6 8 10
Each point represents a specific

combination of goods that can be
produced given full employment of
resources.
NOW GRAPH IT: Put bikes on y-axis and
computers on x-axis 14
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Production Possibilities
How does the PPG graphically demonstrates scarcity,
trade-offs, opportunity costs, and efficiency?
Impossible/Unattainable
A (given current resources)
14
B
12
G
10 C
Bikes
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Efficient
6 D
4 Inefficient/
Unemployment
2
E
0
0 2 4 6 8 10 15
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Computers
Opportunity Cost
Example:
1. The opportunity cost of
moving from a to b is… 2 Bikes
2.The opportunity cost of
moving from b to d is… 7 Bikes

moving from d to b is… 4 Computer

moving from f to c is… 0 Computers
5.What can you say about point G?
Unattainable
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The Production Possibilities
Curve (or Frontier)
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A B C D E
CALZONES 4 3 2 1 0
PIZZA 0 1 2 3 4
• 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)
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A B C D E
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
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Constant vs. Increasing
Opportunity Cost
Identify which product would have a straight line
PPC and which would be bowed out?
Corn Cactus
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Wheat Pineapples
Econmovies
Episode 3: Monsters Inc.
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The Production Possibilities
Curve and Efficiency
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Two Types of Efficiency
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.
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Productive and Allocative Efficiency
Which points are productively efficient?
Which are allocatively efficient?
Productively Efficient
A
14 combinations are A through D
B G
12
Allocative Efficient
10
combinations depend on
Bikes
8
C
the wants of society
6 E (What if this represents a
4 country with no electricity?)
F
2
D
0
0 2 4 6 8 10
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Computers 24
Why two types of efficiency?
Is combination “A” efficient?
Yes and No. It is productively efficient but it is not the
combination society wants
Size 20 running
shoes
Copyright Size 10 running shoes

2008 Audit Exam
2008 Audit Exam
Shifting the Production
Possibilities Curve
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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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What happens if
there is an increase
in population?
Computers
Pizzas 30
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What happens if
there is an increase
in population?
Computers
Pizzas
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What if there is a
technology improvement
in pizza ovens
Computers
Pizzas
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What if there is a
technology improvement
in pizza ovens
Computers
Pizzas
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Capital Goods and Future Growth
Countries that produce more capital goods will have
more growth in the future.
Panama – Favors Mexico – Favors
Consumer Goods Capital Goods
Current
PPC Future
PPC
Capital Goods
Future
Capital Goods
PPC
Current
PPC
Consumer goods Consumer goods
Panama Mexico
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PPC Practice
Draw a PPC showing changes for each of the
following:
Pizza and Computers (3)
1. New computer 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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Question #1
New computer making
technology
A shift only for

Computers
computers
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Pizzas 36
Question #2
Decrease in the demand for pizza
The curve doesn’t shift!

A change in demand
Computers
doesn’t shift the curve
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Pizzas 37
Question #3
Mad cow disease kills 85% of cows
A shift inward only for

Computers
Pizza
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Pizzas 38
Question #4
Capital Goods (Guns) Destruction of power plants
Decrease in resources
decrease production
possibilities for both
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Consumer Goods (Butter) 39
Question #5
Faster computer hardware
Quality of a resource
Capital Goods (Guns)
improves shifting the

curve outward
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Question #6
Many workers unemployed
The curve doesn’t shift!
Unemployment is just a
point inside the curve
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Question #7
Significant increases in education
The quality of labor is

improved. Curve shifts
outward.
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Extra graph to manipulate or add to
powerpoint or questions
Capital Goods
X
Y
Z
PPC1 PPC2 PPC3
Consumer Goods
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Monday, August 21

Each point represents a specific

3.The opportunity cost of

4.The opportunity cost of

Copyright Size 10 running shoes

Consumer goods Consumer goods

A shift only for

The curve doesn’t shift!

doesn’t shift the curve

A shift inward only for

improves shifting the

The quality of labor is

PPC1 PPC2 PPC3

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