2Production Possibility CurvesProduction Possibility CurvesPPC is a model used todemonstrate opportunity costsas it diagrams variouscombinations of goods/servicesan economy can produce whenall productive resources areemployed.
3Economics involves choicesince limited resources meansthat there will be a limitedoutput. A PPC will show thatas tradeoffs are made, sacrificeor opportunity costs areincurred.Production Possibility CurvesProduction Possibility Curves
4Production Possibility CurvesProduction Possibility CurvesOpportunity CostOpportunity Cost is defined as theis defined as thevalue of the next best alternative.value of the next best alternative.So…opportunity cost measures theSo…opportunity cost measures thesacrifice we make when we are forcedsacrifice we make when we are forcedto make choices due to scarcity.to make choices due to scarcity.
5Production Possibility CurvesProduction Possibility CurvesChoice A B C D ESHOES (000,000) 0 1 2 3 4ROBOTS (000) 10 9 7 4 0Using data given in the table, an economythat produces shoes and robots will haveto make choices.
6Points on the curve:Attainable & Efficientwith these resourcesProduction Possibility CurvesProduction Possibility CurvesAACCFFBDDEEWRobotsShoes
9•The concave shape of the curve impliesthe fact that economic resources are notcompletely adaptable.•This curved line shows the degree ofadaptability and increasing opportunitycost.•A straight line would mean constantopportunity cost.Production Possibility CurvesProduction Possibility Curves
10The macroeconomic statistics ofthe Great Depression and theMobilization Planning of WW IIoffer two major events of the 20thcentury that can be used todemonstrate production possibilitycurves.Production Possibility CurvesProduction Possibility Curves
11• Real GDP fell from 29% from 1929 to1933. ($833.2 B to $511.0 B)Great Depression 1929-1933Great Depression 1929-1933• Real Investment fell by 83.6% from 1929to 1933.•Commercial and Industrial constructionfell 85% by 1933.• Industrial production fell 47% belownormal by 1932• Foreign export trade fell by 3.63B by 1932
12• Unemployment Rate rose from 3.2%in 1929 to 25.2% in 1933.Great Depression 1929-1933Great Depression 1929-1933• The number of Employed Workersdropped from 97.5 M in 1929 to 65.9Min 1933.• Payrolls between 1929 and 1933declined 56%.• Farmers’ gross income fell 57% by1932.
13What do these statistics mean in terms ofWhat do these statistics mean in terms ofthe Production Possibility Curve?the Production Possibility Curve?Great Depression 1929-1933Great Depression 1929-1933•Reduced use of resourcesReduced use of resources——land, labor, capital, entrepreneurshipland, labor, capital, entrepreneurship•Reduced income to purchase wants andReduced income to purchase wants andneedsneeds•Reduced set of goods and servicesReduced set of goods and services
14CCoonnssuummeerrGGooooddss Capital GoodsCapital Goods1920’s1920’sThe US economy in theThe US economy in the1920’s was producing1920’s was producingclose to PPC. Manyclose to PPC. Manyconsumer goods and aconsumer goods and afair amount of capitalfair amount of capitalgoods were produced.goods were produced.Great Depression 1929-1933Great Depression 1929-1933
15By 1933, we were usingBy 1933, we were usingonly a fraction of ouronly a fraction of ourproductive resources.productive resources.Consumer goods andConsumer goods andcapital goods productioncapital goods productionwas very low.was very low.Great Depression 1929-1933Great Depression 1929-193319331933CCoonnssuummeerrGGooooddss Capital GoodsCapital Goods1920’s1920’s
16By 1933, the US wasBy 1933, the US wasoperating well insideoperating well insidethe Productionthe ProductionPossibility Curve.Possibility Curve.Great Depression 1929-1933Great Depression 1929-193319331933CCoonnssuummeerrGGooooddss Capital GoodsCapital Goods1920’s1920’s
18Great Depression 1929-1933Great Depression 1929-1933Another problem of the GreatAnother problem of the GreatDepression wasDepression was thatthat somesomeresources were idled for soresources were idled for solong that they could not belong that they could not beretrieved and used again.retrieved and used again.We lost some of ourWe lost some of ourresources forever.resources forever.
19• Between 1939 and1941, industrialproduction doubled,with consumer goodsrising 25%.Mobilization for WW IIMobilization for WW II• The Federal government spent $16Bto convert existing and to build newproduction facilities.
20Production of newmachinery quadrupledby 1942.• Transportationequipment production(automotive, aircraft,railroad, and ships)jumped by 7 times by1944.Mobilization for WW IIMobilization for WW II
21Mobilization for WW IIMobilization for WW IIMaterial shortages(aluminum, iron,rubber, gas and oil)were overcome byscrap recovery, newdiscoveries ofminerals, and greaterproductive capacity.
22Mobilization for WW IIMobilization for WW II• Between 1940 and1945, the laborforce increased20% even though12M men andwomen entered thearmed forces.
23Mobilization for WW IIMobilization for WW IIThe number ofwomen workingincreased by 5M,with womenfactory workersdoublingbetween 1939and 1944.
24• On average,the number ofhours in theworkweekincreased by20%.Mobilization for WW IIMobilization for WW II
25• The War Production Board saidthat “productivity — output perman-hour—climbed sharply, asvolume increased, manufacturingmethods improved, and workersresponded to appeals to move themunitions to the fighting frontsfaster and faster”.Mobilization for WW IIMobilization for WW II
26Mobilization for WW IIMobilization for WW IIThe Production Possibility Curve canmove outward from the origin for anumber of reasons.• increases in the factors ofproduction—land, labor andcapital• increases in the productivity ofthese factors• improved technology
27ConsumerGoodsMilitary GoodsMilitary GoodsMobilization for WW IIMobilization for WW II193319331940194019441944• By 1944, warspending was40% of GDP.
28Mobilization for WW IIMobilization for WW IIThis movement of the PPC indicatesThis movement of the PPC indicatesECONOMIC GROWTH.ECONOMIC GROWTH.Growth is the fuel that increases thestandard of living.New inventions, processes, and improvedtraining for workers gave a boost to theeconomy and set the stage for the growththat occurred in the 1950’s and 1960’s.