Chapter 1
Section 3: Production
Possibilities Curve
Production Possibilities
• Economists use graphs to analyze the
choices & trade offs that people make
to help us see how one value relates
to another value
• Production possibilities curve shows
alternative ways to use an economy’s
productive resources
–The axes of the graph can show
categories of goods & services, or
any pair of specific goods or
services
• Drawing a production possibilities
curve
–Start by deciding which goods &
services to examine
•The production possibilities frontier is
the line that shows the maximum
possible output for that economy.
Production Possibilities Graph
25
Shoes
(millions of pairs)
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
(millions of tons)
20
15
10
a (0,15)
b (8,14)
c (14,12)
d (18,9)
5
A production
possibilities frontier
0
e (20,5)
f (21,0)
5
10
15
20
Watermelons (millions of tons)
25
Trade offs
• Using the factors of production to
make one product means that
fewer resources are left to make
something else
Efficiency, Growth, & Cost
• Graph shows us how efficient an
economy is, whether an economy
has grown or shrunk, & the
opportunity cost of a decision to
produce more of one good or
service
Efficiency
• Production possibilities frontier
represents an economy working at its
most efficient level of production
• Def.–using resources in such a way as
to maximize the output of goods &
services
Production Possibilities Graph
Shoes (millions of pairs)
• Any point
inside the line
indicates an
underutilization
of resources
25
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
g (5,8)
5
d (18,9)
e (20,5)
A point of
underutilization
0
5
10
f (21,0)
15
20
Watermelons (millions of tons)
25
Growth
• Production possibilities curve the
country’s current production
possibilities as if the country’s
resources were frozen in time
–In real time, the quantity of
resources is constantly changingcurve will move
• When an economy grows, economists
say that the entire production
possibilities curve has “shifted to the
right”
• When a country’s production capacity
decreases, the curve shifts to the left
–Ex: war, aging population
Production Possibilities Graph
25
Future production
Possibilities frontier
T
Shoes (millions of pairs)
• If more
resources
become
available, or if
technology
improves, an
economy can
increase its
level of output
& grow.
20
S
15
a (0,15)
b (8,14)
c (14,12)
10
d (18,9)
5
e (20,5)
f (21,0)
0
5
10
15
20
Watermelons (millions of tons)
25
Cost
• Not necessarily money
• Def.- alternative we give up when
we choose one option over
another
• Opportunity cost
• Law of increasing costs- as
production switches from one item to
another, more & more resources are
necessary to increase production of
the second item
–Opportunity cost increases
• As we move along the curve, we trade
off more & more to get less & less
additional output
• To move from point c to point d on this
graph has a cost of 3 million pairs of shoes.
Production Possibilities Graph
25
0
15
8
14
14
12
18
9
20
5
21
0
Shoes (millions of pairs)
Watermelons
Shoes
(millions of tons) (millions of pairs)
20
15
c (14,12)
10
d (18,9)
5
0
5
10
15
20
25
Watermelons (millions of tons)
Resources & Technology
• When economists collect data to
create a production possibilities curve,
they must first determine which goods
& services a country can produce,
given its current resources
• Land, natural resources, work force, &
physical & human capital
Technology
• A country’s production possibilities
depend on both its technological level
& the resources it has available