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Making Choices

PRODUCTION POSSIBILITIES

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Reminders

  • Scarcity forces us to make Choices
  • Anytime we make a choice, we lose the opportunity to do something else.
    • Opportunity Cost – the next best thing we could have done instead.

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Production Possibilities

  • All the combinations of goods and services that can be produced from a fixed amount of resources in a given period of time.

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Production Possibilities

  • Two assumptions.
      • The amount of available technology and resources will not change during the period of time being studied.
      • All the resources, natural, human, and capital, are being used in the most efficient manner possible.

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Production Possibilities Curve

  • Points inside the curve represent an inefficient use of resources.
  • Points outside the curve represent a production impossibility.

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Future Production Possibilities

  • In the real world factors of production change along with technology.
  • Changes affect the Production Possibilities Curve.
  • Curve may shift to the right or to the left.

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Production Possibilities Curve

A

10

0

B

9

1

C

7

2

D

4

3

E

0

4

Type of Product

Guns

(in hundreds)

Pounds of Butter

(in hundred thousands)

Production Alternatives

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Production Possibilities Curve

Attainable

Guns

Pounds of Butter

0 1 2 3 4 5 6 7 8 9

14

13

12

11

10

9

8

7

6

5

4

3

2

1

Unattainable

A

B

C

D

E

Economic

Growth

Now Attainable

A’

B’

C’

D’

E’

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Time to Apply

  • Draw a production possibility curve with CDs and DVDs
  • How does the curve expand if you increase productivity by 100%?

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Type of Product

CDs

DVDs

Production Alternatives

A

5

2

B

4

4

C

3

6

D

2

8

E

1

10