ProductionPossibilities
Let us suppose that production in the economy can be divided into
two broad cate gories. Suppose the economy can produce either
computers or movies. With a scarcity of resources such as labor
(workers ) and capital(moneyfor business
), there is a choicebetween
producing some goods, such as computers, versus other goods, such
as movies . The table below gives an example of the alternative
choices, or the production possibilities, for computers and movies.
Each choice, A-F, leads to different production numbers. Marginal
analysis (cost-benefit analysis) is used determine if the potential
increase in profits outweighs the associated costs of choosing different
able 1 ..1
business activities.
~
od
c io
Mov -es
.~
B
C
0
._
Page 14
~00
:>O
0
~oo
5
a
Possibiliaies
Computers
2 5 ,'000
2· .000
"'"'2.000
I 8.
GO
1 :; ..no
IncreasingOpportunityCost
The opportunity cost of producing more movies is the value of
the computers not produced, and vice versa. The opportunity
cost, in terms of computers, of producing more movies
increases as we require a loss of more and more computers.
What we've just described is called increasing opportunity
costs. Moving from production possibility A to B requires an
opportunity cost of 1,000 computers (25,000 to 24,000), but
moving from production possibility A to C increases the
opportunity cost to 3,000 computers (25,000 to 22,000).
Page 2
The ProductionPossibilitiesCurve/Frontier
The figure on the right is a graphical representation of the
production possibilities table on the left. We put movies on the
horizontal axis and computers on the vertical axis on the graph.
Mov
ies
.A
0
25,000
B
100
2 ,000
C
200
22.000
D
t
300
18,000
500
13,000
0
,ioo
I
~
I __
;i
ciem
------ ---==~-=-------~/----~-:::-1--~-j
--------
1•
' --------/
-- I
I
---------
D
..
• J
6
Proou -ri, n pc,. ib1 mr. c nn r,i/
_/
F
fl
Page 3
l
2
-~
I
The ProductionPossibilitiesCurve/Frontier(cont.)
A production possibilities curve/frontier (PPC/PPF) graphs both
short-run (SR) and long-run (LR) tradeoffs, communicates choices,
scarcity, and opportunity costs. A production possibilities curve/frontier
with a curve indicates increasin g/not proportional opportunit y costs
anywhere on the line for both items. When moving from point A to B,
to make two computers (0 to 2) requires an opportunity cost of two
bikes (14 to 12). Moving from B to C increases the number of
computers by two (2 to 4) but the opportunity cost is now about 3 bikes
(12 to 9). Notice that the changes aren't constant/proportional. The
resources being used are not easily adaptable between both products.
Impossible/Unattainable
(given
3 Shifters of the PPC/PPF
Changes in:
u,
1. technology
~
2. trade
·3. resource/input quantity
or quality
m
8
1.
6
\
inefficient
level
2. full output level
3. natural rate of
unemployment
2. un employm ent
3. contraction
4. recession
4
2
0
0
2
4
6
8
Computers
Page 17
resources)
Jimpossible/expansion
• H 1. full employment
Fe
10
current
"10
The ProductionPossibilitiesCurve/Frontier(cont.)
A production possibilities curve /frontier with a straight line
indicates constant /proportional opp ortunit y costs anywhere on the
line. The resources are easily adaptable between both products. If
the PPC /PPF is a straight line , the amount of Y you have to give up
to make one more X is the same everywhere , and the amount of X
you have to give up to make one more Y is the same everywhere as
3 Sh ifters of the PPC/PPF
We11
.
Changes in:
Good
A
1. full employment level
2. full output level
B
260
200
i
~
140
0
-
/
3. natural rate of unemploy B:'i
~~t'ity
-- -----------·
I
I
I
I
__________ _.___ _
A
1. inefficient
:I
t
2. unemployment •••• _:_ ____ _
•
3. contraction :
:
I
4. recession
•
I
I
I
I
........_
...........................
............,_
...............
_____________________
30
Page 18
1. technology
2 . trade
3. resource/input quantity
60 _
_,,
•,
impossible/expansion
..........................................
...;;......
..........
Good
B
The ProductionPossibilitiesCurve/Frontier(cont.)
This means that the production of goods X and Y uses
resources that are perfect substitutes for each other. Below, for
every increase of 30 of good B, there is a decrease of good A
by 60. For every increase of good A by 60, there is a decrease
of good B by 30. Both goods have constant opportunity costs .
3 Shifters of the PPC/PPF
Changes in:
1. technology
2. trade
Goo d A
1. full employment level
2. full output level
3. natural rate of unemployment 3. resour~e/input quantity
B
260
200
-
/
I
I
I
I
I
---------- ,•---1. inefficient
1 40
or quality
:
2. unemployment~-----3. contraction
•I
I
4. recession
I
I
A
I
~---:
-
"'-impossible/expansion
I
I
I
I
I
I
0 .....................................................................
_ ........................................................
__
.............................................
-"""""""'
30
60 ~~
Good
Page 19
B
epending on where an econom y is during its economic
fluctuations/business cycle, this determin es the location of the dot. On
either line, curved or straight, indicates efficient or production efficient
(the maximum amount that can be produced with the available resources at
hat time). On either line usually but not always indicates full use of
esources , full employment, and peak output in an economy. This means
hat production is allocatively efficient (the most efficient distribution of
available resources for a firm/coun ). A dot on either line can also mean
hat production is socially optimal (the optimal distribution of resources in
societ that is best for frrms/countries and for socie itself), but what is best
for a firm/coun try is rarely also what is best for society.
Impossible/Unattainable
14
(g i ven
A
• H
10
(1)
-=-:: 8
·al
6
4
2
resources)
Good
A
/impossible/expansion
12
U,
current
level
• full output level
3. natural rate of
unemployment
1. inefficient
2. unemployment ,
3. contraction
4. recession
2
4
impossible/expansion
20
J -1.{nemcien
r- - :
l
t -----
140
- -
0xl!l~!1
~--1.!!l~!l!e~
!
3. contraction
:
4. recession
:
I
0
0
B
1. full employment
1. full employment level
2. full output level
3. natural rate of unemployment
6
8
Computers
10
o-------.....__
:
I
•
__
I
I
60
A
90
_
G ood
B
The ProductionPossibilitiesCurve/Frontier(cont.)
To the left of the line indicates unemployment, contraction of
the economy, under production, possible labor force reduction
and recession, and inefficienc y because the economy can
produce a larger number. Points inside the production
possibilities curve/frontier, like F and B, are possible, but they
are inefficient.
lmpossible/Unattainable
14
(given current resources)
A
lmpossible /expansion
.H
12
U,
'
C1)
~8
·m
1. full employment
F
10
level
2. full output level
3. natural rate of
unemployment
'
6
1. inefficient
2. unemplo yment
3. contraction
4. recession
4
2
1. full employment level
2. full output level
3. nat ral rate of unemployment
Good A
IB
impossible /expansion
! T iiiCffi.Cie
iit ___,
200
2. unemployment :
".J.
.-....
140 -~·-CQUv.
J lC_f lQU ___ 1.I ____
•
I
4 . recession
,
I
_
:
I
I
0
0
2
4
6
8
10
Computers
Page 21
"' · A
0-------------
....
60
90
Good B
The ProductionPossibilitiesCurve/Frontier(cont.)
Anything to the right of the line indicates long-run aggregate
supply (LRAS) (a country's total supply of goods and services in
the long-run) expansion, over production, and an impossibility
because the economy does not have the resources at that time to
produce those quantities. Based on a comparison of points A-E,
the increasing opportunitycost of making mare carop11tersis
highest at E since it is the largest amount of computers made
with the largest amount of' bikes lost.
Impossible/LI
14
A
12
~
~
·m
(g iven current
F'
6
1. inefficient
2
1. full employment level
2. full output level
3. na ral rate of unemployment
Good A
resources)
/impossible/expansion
10
8
4
nattai nab le
• H
2. unemployment
3 . contraction
.
4. recession
G
1. full employment
level
2. full output level
3. natural rate of
unemployment
impossible / expansion
B
200
+
140
.
2. unemployment :
.
:
0
2
4
6
8
Computers
Page 22
.
-3.-confradioii
---~: ----- ,
.
4. recess10n
0
' -A
•
1 --------------1. inefficient
I
I
I
I
10
0
--------------------60 ___.
90
-+
Goo d B
T
from point R to point S?
---------,----I
1
I
I
I
I
I
I
I
--------
0
I
~-----~------1
:
I
I
I
I
I
I
I
I
I
I
I
5
1. The pp rtunity c t f m vin
p int R to point T i
ne unit fG d
five unit fG d
.
.
ix uru
fG dY
three uni
fG dX
e en um
fG d
. T?
from point S to point .
12
r ducti n fr m
T
urve ront1er- . s
from point R to point S?
---------,----I
one unit of Good Y
1
I
I
I
I
I
I
I
--------
0
I
~-----~------1
:
I
I
I
I
I
I
I
I
I
I
I
5
1. The pp rtunity c t f m vin
p int R to point T i
. T?
from point S to point .
five units of Good Y
12
r ducti n fr m
ne unit f G d '-._
B five unit f G d {__,-if X moves from 5 to 12 units, Y has to decrease from 10 to 4
.
ix uru
fG dY
gaining (moving from 5 to 12 units), so Y has to be "who" is
D three uni f G d X ~Xis
f G d X.,,-- losing
E e en um
•
I r du ti 1.
. ·t d I .~1 ~ •
ti
d
. fficiency to impossibility/
1ne
. )?
(economic expansion .
efficiency to impos~ibil~ty/
(economic contraction) .
ii ili
l.
rn n I
. I
t
i nt
urve ront1er- . s
. fficiency to impossibility/
1ne
. ?
economic contraction.
Wto X , Y, or Z
efficiency to impossibility/
.
?
economic contraction.
X, Y, or Z to V
n Lh
l.
ii ili
rn n I
•
. I
t
l
i nl
..- ______this is a move from efficiency to efficiency because they are
both on the line
--this
is a move from inefficiency to efficiency
4--this is a move from the impossible to efficiency
p s. i ,il itic. ·ur,
•
\.\
•
lowest at?
n f int
f an a ·ti n, l
.
hi
hi
hi
1
h
1n
.
1n
am
z
int
z
and Z
um r
ti 11
p s. i ,il itic. ·ur,
•
\.\
•
lowest at?
X
na m
rtuni
Bad
th
•
.
hi
hi
hi
1n
.
h
am
and Z
um r
~ point X is the lowest point
•
in z
1n
DI
E
n f int
fan a 'ti n, l
of opportunity cost (lowest
consumer and highest capital goods)
point Y is the center point of opportunity cost (middle
consumer and middle capital goods)
int ~ .....
----x
t int
z ~ hmmmmm, NO; they are different points
The ProductionPossibilitiesCurve/Frontier?s
1. Two alternative production possibility fronti r
for apples and \vheat are sho\vn in the figures
below.
WHEAT
F igure l
WHEAT
Figure 2
A 1nore wheat is produced, how will the
opportunity co t of producing wheat, a
represented in Figures 1 and 2 be affected?
Figure 1
(A) Decrea e
(B ) Increa e
(C) No change
(D) No change
(E) Increa e
Page 16
Figure 2
Increase
Decrea e
Increase
Decrease
No change
The ProductionPossibilitiesCurve/Frontier?s
1. Two alternative production possibility fronti r
for apples and \vheat are sho\vn in the figures
below.
WHEAT
F igure l
WHEAT
Figure 2
A 1nore wheat is produced, how will the
opportunity co t of producing wheat, a
represented in Figures 1 and 2 be affected?
Figure 1
(A) Decrea e
(B ) Increa e
<e No change
(D) No change
(E) Increa e
Figure 2
Increase .......__
figure 1 is a production possibilities curve/frontier
Decrea e .,_,,--with proportional /not increasing opportunity costs
Increase
DeCi tttS&..-increase; making more wheat = increased loss of apples
No change ... figure 1 is a production possibilities curve/frontier
with proportional /not increasing opportunity costs
Page 17
The ProductionPossibilitiesCurve/Frontier?s
22. Which of the following condition i nece ary
for productive efficiency?
A The firm i producing at the point where the
marginal product of labor i greater than the
average product of labor.
B The firm i producing a given level of output
with a lea t-co t combination of input .
C Con umer urplu i minimized.
(D There are external co t .
(E) There i no government regulation.
Page 18
The ProductionPossibilitiesCurve/Frontier?s
22. Which of the following condition i nece ary
for productive efficiency?
A
The
firm i producing
·
margma
average
at the point where the ~the amount produced by
I pro d uct Of 1ab or 1· greater t h an t h e what
each worker compared to
they produce on
product
of labor.
average isn't relevant
The firm i producing a given level of output
with a lea t-co t combination of input .
C Con umer urplu i minimized ....what buyers get because they don't pay
what they are willing to has nothing to do
(D Th ere are ex terna 1 co t ...
with pro. efficiency
_
(E) There i no government regulation.
'there are always external costs and
government regulation isn't a factor
Page 19
The ProductionPossibilitiesCurve/Frontier?s
1. Which of the following is always true of an
economy operating on its production possibilitie
frontier?
(A) It re ource are fully employed.
(B) It i allocatively efficient.
(C) It cannot trade with other nation becau e it
i the mo t efficient producer of tradeable
good .
(D) It will nece sarily operate on the same fron tier the following year.
(E) It must be a command economy.
36. Which of the following would shift a country'
production po ibilitie curve inward?
(A) A reduction in the country' inflation rate
(B) A reduction in the country' real intere t rate
(C) A reduction in the size of the country's labor
force
(D) An increase in the typical retirement age in
the country
(E) An increa e in the country' cyclical
unemployment rate
Page 20
The ProductionPossibilitiesCurve/Frontier?s
1. Which of the following is always true of an
economy operating on its production possibilitie
frontier?
(e ) It re ource are fully employed. •
true
(B) It i allocatively efficient.
not always
(C) It cannot trade with other nation becau e it •
not true
i the mo t efficient producer of tradeable
good .
(D) It will nece sarily operate on the same fron - ..-not necessarily
tier the following year.
(E) It must be a command economy. • not true
36. Which of the following would shift a country'
production po ibilitie curve inward?
(A) A reduction in the country' inflation rate:::7this would shift it outward
(B) A reduction in the country' real intere t rate
(e ) A reduction in the size of the country's labor
force
(D) An increase in the typical retirement age in >
the country
this would not necessarily
(E) An increa e in the country' cyclical ..
shift it inward
unemployment rate
Page 21
The ProductionPossibilitiesCurve/Frontier?s
54. For an econo111
y that i operating in id· it
producti n po ibiliti curv which of th
followi ng i tru ?
A It can incr a th production of both good .
B It popul ation i grow ing fa t r than th
con rny ~ abili ty to incr a · production.
C It is u ing all availabl r sourc s ffici ntly.
D It cannot 1nov to a point on th production
po ibiliti curv with availabl
tec hno lo1gy.
E It la k th r ourc to incr a pr du tion
yond it CUTT nt output.
Page 22
The ProductionPossibilitiesCurve/Frontier?s
54 . For an econo111
y that i operating in id· it
producti n po ibiliti curv which of th
following i tru ?
e It can incr a
th production of both good .
B It popul ation i growing fa t r than th .__--population
by itself has
con rny ~ abili ty to incr a . production.
nothing to do with production
C It is u ing all availabl r sourc s ffici ntly. • nope
D It cannot 1nov to a point on th production +--not true
po ibiliti curv with availabl
tec hno lo1gy.
E It la k th r ourc to incr a pr du tion • not known with this
information
yond it CUTT nt output.
Page 23
The ProductionPossibilitiesCurve/Frontier?s
>0
Q
0
0
25
0
50 GOOD X
16. According to the prodUJctionpossibilities curve
above, which of the following is true?
(A) Th e opportunity cost of producing ano ther
unit of good Y in terms of good X
increases as rnore of good Y is produced.
(B) Th e opportunity cost of producing ano ther
unit of good Y in terms of good X
decrease as more of good Y is produced.
(C) Th e opportunity cost of producing another
unit of good X in terms of good Y
increases as more of good X is produced.
(D) Th e opportunity cost of producing another
unit of good X in terms of good Y
decreasesas rnore of good X is produced.
(E) The opportunity cost of producing another unit
of either good remains constant as the
produ ction of the other good increases .
Page 24
The ProductionPossibilitiesCurve/Frontier?s
>0
Q
0
0
25
0
50 GOOD X
16. According to the prodUJctionpossibilities curve
above, which of the following is true?
(A) Th e opportunity cost of producing another
unit of good Y in terms of good X
iiietease~ s rnore of good y is produced.
(B) Th e opportunity cost of producing another ..-----------...:::~
unit of good Y in terms of good X
a!Ctta JNoas more of good y is produced.
(C) Th e opportunity cost of producing another
unit of good X in terms of good Y
iritteas08ias more of good X is produced.
(D) Th e opportunity cost of producing another
unit of good X in terms of good Y
11etteascs as rnore of good X is produced.
•
Page 25
The opportunity cost of producing another unit
of either good remain s constant as the
production of the other good increases .
h
h•
t e grap ISa
......PPC/F that has
constant
Opportunity COStS
Macro./Micro. Do-Now
Please do this:
1. Draw a graph of a production possibilities curve/frontier
showing constant opportunity costs. Use any variables
you want. Label point ''A'' as efficient and a sign of
allocative efficiency and possibly socially optimal, point
''B'' as not inefficient/showing a contraction of an
economy, and point ''C" as impossible right now but an
indication of future expansion. No numbers are
necessary .
. Draw a graph of a production possibilities curve/frontier
showing increasing/not proportional opportunity costs.
Use ''Bikes'' as the vertical variable and ''Computers'' as
the horizontal one. No numbers are necessary.
aero.
ow
1.
3 Shifters of the PPC
Changes in:
1. technology
2. trade
3. resource quantity
or quality
1. full employment level
2. full output level
3. natural rate of unemployment
B
260
200
---
I
I
I
I
I
I
I
I
I
1. inefficient
:
I
2. unemployment:
3. contraction
t • • • • ··4. recession
:
C
"-impossible/expansion
I
I
I
I
I
I
I
I
••
30
00
8
aero.
ow
2.
lmpo ble/Ua ai a I
14
3 Shifters of the PPC/PPF
Changes in:
1. technology
2. trade
3. resource quantity
or quality
(givencurrentresources)
A
Impossible/expansion
12
F
10
C
H
1. full employment
level
2. full output level
3. natural rate of
unemployment
8
10
8
I
m6
1. inefficient
2. unemployment
3. contraction
4. recession
4
2
0
0
2
4
6
Compu
Microeconomics
Do-Now
1. Assume that the country of Fischerlandproduces onJy consumer goods and capital goods.
v.i
o r-·--o
0
CJ
~
~
::)
(/)
z0
u
(a) The graph above shows the production possibilities curve for Fischerland. The production of which of the
following exhibits increasing opportunity costs: consumer goods only, capital goods onJy,both goods, or
neither good?
(b) Redraw the graph given above . Show a point that represents fully employed and efficiently used resources
on the redrawn grap h and label it A.
(c) Assun1e there is a recession in Fischerla nd. On your graph in part (b), label as Ca point representing the
.
recession.
Page 29
Microeconomics
Do-Now
1. 3 poin ts (1 + 1 + 1)
§,.._
___
Vl
~
~
~
ti)
z
0
u
.c
CAPITAL GOODS.
{a) 1 point :
• One point is earned foI answering bo th goods .
{b) 1 point :
•
One point is earned for showing point A on the production possibilities curve .
{c) 1 point :
•
Page 30
One point is earned for showing point C inside the production possibilities curve.
Shiftsin the ProductionPossibilitiesCurve/Frontier
The production possibilities curve/frontier (PPC/PPF) represents a tradeoff
and decisions to be made concerning scarce resources. Do I buy the 90-inch
flat screen LED TV from Best Buy or spend more money on my fiance's
engagement ring? (tough call!) The production possibilities curve is not
immovable; it can shift out or in. Smarter workers, technological
innovations, etc.; all could shift the curve out. When the production
possibilities curve/frontier shifts out, the economy grows because more
goods and services are being produced. As the production possibilities
curve/frontier shifts out, impossibilities are converted into possibilities . But,
the production possibilities curve/frontier can also shift in, usually during
natural disasters like a hurricane or tornado. The PPC/PPF can also shift in
or out for only one of the variables while the other variable remains the
increase in wheat
production
only
1
3
WHEAT
Page 44
(/) increase in the quantity
riJ
of apples demanded
only
\VHEAT
decrease in the quantity
UJ
of apples demanded
only
O:
C/)
~
4
WHEAT
\\'HEAT
Shiftsin the ProductionPossibilitiesCurve-Questions
16. A production po ibilitie curv can hift inward
if th re i
A) an incr a e in productivity
(B) an increa e in une1nployment
C) an increa e in th p1ice of raw mate1ial
(D) a mi allocati n of r ourc
(E) a natural di a t r
Page 32
Shiftsin the ProductionPossibilitiesCurve-Questions
16. A production po ibilitie curv can hift inward
if th re i
A) an incr a e in productivity
(B) an increa e in une1nployment
this would shift the PPC/F outward
C) an increa e in th p1ice of raw mate1ial
(D) a mi allocati n of r ourc
a naturaldi a t r
e)
Page 33