Intro: Production possibilities

Slope of production possibilities curve

= to The opportunity cost of the good measured on the horizontal axis.

3 things production possibilities does

Answers the "What?" question of allocation Helps us understand macroeconomic concepts and terms of unemployment, opportunity cost, full employment, investment and economic growth Introduces graphical analyses techniques.

Unemployment

Any point INSIDE the production possibilities curve.

Foundation of possibilities production

Assumptions

Shape of production possibilities curve

Convex to the origin, represents the law of increasing opportunity cost.

2 limitations

Does not address preference or what is most satisfying and does not indicate economic efficiency, only technical efficiency

Full employment

Exists at every point ON the production possibilities curve. Practically, happens when the unemployment rate is around 5% to 5 1/2 % and the capacity utilization rate of capital is about 85 %.

Capital goods

Expand the economy's production capabilities and shift out the production possibilities frontier.

4 key assumptions

Resources are used to produce one or both of only 2 goods The quantities of resources do not change The info and technology the society has about the production of goods & services is fixed Resources are used in a technically efficient way.

Economic growth

The long-run expansion of the economy's ability to produce output, attained by increasing the quantity or quality of the economy's resources - labor, capital, land, and entrepreneurship - through such things as population growth, investment, exploration, technological innovation, and education.

Exploration

The process of discovering minerals, fossil fuels, or other raw materials in the land. It is a fundamental act of investment. It requires up front expenses (which mean foregoing other activities) without any guarantee that the process will be successful.

Human capital

The sum total of a person's productive knowledge, experience, and training.

Production possibilities schedule

a table of numbers that illustrates the production possibilities of an economy- the alternative combinations of 2 goods that the economy can produce with given resources and technology.

Assumption

an abstraction from the real world that sets the stage for analysis, intended to establish abstract benchmarks for comparison and to break an analysis into simpler, more easily manageable parts

Production possibilities

an analysis of the alternative combinations of two goods that can be produced with existing resources and technology.

Productive capital goods

can be broadly interpreted. including not only "standard" capital tools and equipment, but also education, human capital, technology, and anything that makes resources more productive

Law of increasing opportunity cost

states that the opportunity cost of producing a good increases as more and more of the good is produced. Plays a key role in the production and supply of goods

Investment

the acquisition of productive capital goods that are used to expand future production capabilities.