The document discusses production possibility curves and opportunity costs. It explains that a production possibilities curve illustrates the maximum quantities of two goods an economy can produce with limited resources, and that opportunity cost is the best alternative given up when choosing one option over another. The curve slopes downward to show increasing opportunity costs as more is allocated to one good and less to another. Shifts in the curve can occur due to technological advances, resource discoveries, or other changes that impact the quantity of total output possible.

1. PPrroodduuccttiioonn PPoossssiibbiilliittyy
Chapter 2-1

2. IInnttrroodduuccttiioonn
Every decision has an opportunity
cost – the cost in foregone
opportunities.

3. IInnttrroodduuccttiioonn
A production possibility curve is used
to illustrate opportunity cost.

4. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittiieess
MMooddeell
The production possibilities curve
shows the trade-offs among choices
we make.

5. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittyy
TTaabbllee
A production possibility table lists
a choice's opportunity costs by
summarizing what alternative outputs
you can achieve with your inputs.

6. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittyy
TTaabbllee
Output – an output is simply a result
of an activity.
Input – an input is what you what
you put into a production process to
achieve an output.

7. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aann IInnddiivviidduuaall
A production possibility curve
measures the maximum combination
of outputs that can be achieved from
a given number of inputs.
It slopes downward from left to right.

8. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aann IInnddiivviidduuaall
The production possibility curve not
only represents the opportunity cost
concept, it also measures the
opportunity cost.

9. TThhee PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aann IInnddiivviidduuaall
The production possibility curve
demonstrates that:
There is a limit to what you can achieve,
given the existing institutions,
resources, and technology.
Every choice made has an opportunity
cost—you can get more of something
only by giving up something else.

10. AA PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aa SSoocciieettyy
The production possibility curve is
generally bowed outward.
Some resources are better suited for the
production of some goods than others.

11. AA PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aa SSoocciieettyy
Y
10
98
654321
0
2Y
.
If the slope of the production
A
1X
curve is -2 at A, the
opportunity cost
of 1X is 2Y.
1 2 3 4 5 6 7 8 9 X
7
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

12. AA PPrroodduuccttiioonn PPoossssiibbiilliittyy
CCuurrvvee ffoorr aa SSoocciieettyy
Comparative advantage explains
why opportunity costs increase as the
consumption of a good increases.
Some resources are better suited for the
production of some goods than to the
production of other goods.

13. IInnccrreeaassiinngg OOppppoorrttuunniittyy CCoosstt

14. AA PPrroodduuccttiioonn PPoossssiibbiilliittiieess
TTaabbllee aanndd CCuurrvvee
% of resources
devoted to
production
of guns
Number
of guns
% of resources
devoted to
production
of butter
Pounds
of butter Row
0
20
40
60
80
100
0
4
7
9
11
12
100
80
60
40
20
0
15
14
12
9
5
0
A
B
C
D
E
F
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

15. AA PPrroodduuccttiioonn PPoossssiibbiilliittiieess
11 12
TTaabbllee aanndd CCuurrvvee
A
Butter
15
9
0 4 7 9 Guns
1 gun
5 pounds
of butter
5
3 guns
2 pounds
of butter
B
C
D
E
F
14
12
4 guns
1 pound
of butter
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

16. Why is the production possibility
curve is not a straight line?

17. IInnccrreeaassiinngg MMaarrggiinnaall
OOppppoorrttuunniittyy CCoosstt
The principle of increasing
marginal opportunity cost states
that opportunity costs increase the
more you concentrate on an activity.
In order to get more of something,
one must give up ever-increasing
quantities of something else.

18. EEffffiicciieennccyy
In production, we’d like to have
productive efficiency – achieving as
much output as possible from a given
amount of inputs or resources.

19. EEffffiicciieennccyy
Efficiency involves achieving a goal as
cheaply as possible.
Efficiency has meaning only in
relation to a specified goal.

20. EEffffiicciieennccyy
Any point within the production
possibility curve represents
inefficiency.
Inefficiency – getting less output
from inputs which, if devoted to
some other activity, would produce
more output.

21. EEffffiicciieennccyy
Any point outside the production
possibility curve represents
something unattainable, given
present resources and technology.

22. EEffffiicciieennccyy aanndd IInneeffffiicciieennccyy
Guns
10
8
6
4
2
0
Unattainable point,
given available technology,
resources and labor force
C D
2 4 6 8 10
Butter
A
B
Efficient
points
Inefficient
point

23. TToomm’’ss TTrraaddee--ooffffss:: TThhee
PPrroodduuccttiioonn PPoossssiibbiilliittyy FFrroonnttiieerr

24. Can we produce outside the
production possibility curve?
Can we have more?

25. SShhiiffttss iinn tthhee PPrroodduuccttiioonn
PPoossssiibbiilliittyy CCuurrvvee
Society can produce more output if:
Technology is improved.
More resources are discovered.
Economic institutions get better at
fulfilling our wants.

26. EEccoonnoommiicc GGrroowwtthh
Production The Economic economy growth is initially can results now
at point
in
A an produce (20 outward fish more and shift 25 of of everything.
coconuts),
the PPF
 because it can move production
to point E (25
possibilities fish and 30 coconuts).
are expanded.

27. SShhiiffttss iinn tthhee PPrroodduuccttiioonn
PPoossssiibbiilliittyy CCuurrvvee
More output is represented by an
outward shift in the production
possibility curve.

28. SShhiiffttss iinn tthhee PPrroodduuccttiioonn
PPoossssiibbiilliittyy CCuurrvvee
Neutral Technological Change
Butter
C
A
0 B D
Guns

29. SShhiiffttss iinn tthhee PPrroodduuccttiioonn
PPoossssiibbiilliittyy CCuurrvvee
Biased Technological Change
B
0
A
Butter
Guns
C

30. DDiissttrriibbuuttiioonn aanndd PPrroodduuccttiioonn
EEffffiicciieennccyy
The production possibilities curve
focuses on productive efficiency and
ignores distribution.

31. DDiissttrriibbuuttiioonn aanndd PPrroodduuccttiioonn
EEffffiicciieennccyy
In our society, more is generally
preferred to less and many policies
have relatively small distributional
effects.

32. EExxaammpplleess ooff SShhiiffttss iinn tthhee
PPrroodduuccttiioonn PPoossssiibbiilliittyy CCuurrvvee
Test your understanding:
A meteor hits the world and destroys half
the earth’s natural resources.
Nanotechnology is perfected that lowers
the cost of manufactured goods.

33. EExxaammpplleess ooff SShhiiffttss iinn tthhee
PPrroodduuccttiioonn PPoossssiibbiilliittyy CCuurrvvee
Test your understanding:
A new technology is discovered that
doubles the speed at which all goods can
be produced.
Global warming increases the cost of
producing agricultural goods.