Economics: The Production Possibilities Curve

What basic economic concepts can the PPC be used to model?

-Scarcity -Tradeoffs -Opportunity cost -Economic growth -Efficiency -Unemployment

What does the PPC show?

-That nothing is free and that everything has an opportunity cost -If society wants more of one thing then it must give up something in return -Used to visually represent opportunity cost

Results from the Links and Smiles activity:

1. What resources were scarce in the activity? Paper, scissors, time, labor, etc. 2. What was the opportunity cost of producing all smiles? Links 3. What was the opportunity cost of producing all links? Smiles 4. When did you experience underutilization/inefficiency? Fired, lack of paper, time 5. How does this relate to the real world? Depression, supply shock (tsunami) 6. What allowed you to produce at a point outside the curve? More resources 7. How does this relate to the real world? Internet and technology

Inefficent Point

Any point below the ppc at which the use of resources is not generating the maximum possible output. (D)

Individual PPF - Individual tradeoffs

Constant opportunity cost - linear shape of the curve represents a perfect/proportional tradeoff between two goods

Inputs for production =

Factors of Production

Outputs =

Final Product

Trade offs

Individuals and Trade-Offs - studying one subject vs. another, watching TV or working out, etc. Business Trade-Offs - producing iPod vs. iPhone Society and Trade-Offs - "guns or butter", military or consumer goods

THINKING AT THE MARGIN

Margin - an increment (small unit), a border/edge Thinking at the margin - analyzing the costs and benefits of incremental (small) decisions Marginal Cost - the incremental cost of decision-making. Marginal Benefit - the incremental benefit of decision-making. Incentive - motivating factor to make a decision. Sunk Cost Fallacy - when a person is reluctant to abandon a course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial.

Unattainable Point- currently unreachable point of production

Only reached through an increase in resources

What is the PPC Model?

PPC Model - shows/illustrates the possible combinations of goods and services that can be produced by a single nation, firm or individual given the productive resources available

Efficient - maximum production; using resources wisely

Points along the curve

Underutilization - less than maximum production; using fewer resources than a person/economy/business is capable of.

Points inside the curve, (inefficient use of resources)

Currently unattainable

Points that lie to the right of the production possibilities curve are said to be unattainable because they cannot be produced using currently available resources. (Y)

Society's PPF

Shape of the curve is generally bowed outwards Law of increasing opportunity cost - as production increases, the cost to produce an additional unit of that product increases as well. Some resources are more well suited for one thing vs. another

Is PPC the same as PPF?

The production possibilities curve (PPC) is a graph that shows all of the different combinations of output that can be produced given current resources and technology. Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and tradeoffs.

Trade off-

giving up one thing in order to gain another "There is no such thing as a free lunch." (TINSTAAFL) Who faces tradeoffs? Everyone

Efficient Points

points on the PPF (on the line)

Opportunity Cost-

used by economists to measure the cost of decision-making; the value of the what we give up Next best alternative use of money, time, or resources