Production Possibilities Curve
(Frontier)
Graphing the Combinations of
Production for Two Goods or Services
Shows all of the possible combinations
of two goods or services that can be
produced within a stated time period,
given two very important
assumptions:
• All the natural, human, and capital resources
are being used in the most efficient manner
possible
• The amount of available resources &
technology will not change during the period
being studied
Opportunity Cost
The opportunity cost of an activity
is the value of the resources used in
that activity when they are
measured by what they would have
produced when used in their next
best alternative.
Production possibilities analysis
assumes that:
1. resources and
technology increase with
production.
2. resources are used to
produce thousands of
goods.
3. extra resources are
saved for emergency
use.
4. resources are used in a
technically efficient way.
25%
25%
25%
25%
1
2
3
4
Production of
Economy Cars (in
millions)
Productuion Possibilities Curve
8
6
4
2
0
Productuion
Possibilities
Curve
1
2
3
4
5
6
Production of Luxury Cars (in
millions)
Camry
6.5
5.5
4.5
3
0
Lexus LS
1
2
3
4
5
Therefore, all the combinations on
the curve meet these assumptions
• Combinations that lie inside (below) the
curve represent an inefficient use of
resources
• Combinations that lie outside (above)
the curve represent production
impossibilities, giving existing
technologies
Production of
Economy Cars (in
millions)
Productuion Possibilities Curve
8
6
4
2
0
Unattainable
Productuion
Possibilities
Curve
Inefficient
1
2
3
4
5
6
Production of Luxury Cars (in
millions)
Camry
6.5
5.5
4.5
3
0
Lexus LS
1
2
3
4
5
1.
2.
3.
4.
Productuion Possibilities Curve
Production of
Economy Cars (in
millions)
What is the
opportunity
Cost of
producing 3
million luxury
cars?
8
6
4
2
0
Productuion
Possibilities
Curve
1
2
3
4
5
6
Production of Luxury Cars (in
millions)
25%
25%
25%
2
3
25%
3 million Economy
4.5 million Economy
5.5 million Economy
0 Economy
1
4
In the Real world, technology and
the factors of production do not
remain constant
• When improvements in technology
occur or new resources become
available, the entire production
possibilities curve changes
• A new curve is formed to the right/left
of the original curve.
• This curve has “SHIFTED.”
Prod. of Economy
Cars (in millions)
Production Possibilities Curve
10
8
6
4
2
0
Series1
Series2
1
2
3
4
5
6
Prod. of Luxury Cars (in millions)
What happens to the Production Possibilities curve
when new technologies are introduced into
production?
Prod. of Economy
Cars (in millions)
Production Possiblities Curve
8
6
4
2
0
Series1
Series2
1
2
3
4
5
Prod. of Luxury Cars (in million)
What will happen to the Production
Possibilities Curve if there is a decrease in
the amount of resources available?
Any combination of products inside
the production possibility frontier is:
1. Allocatively
inefficient
2. Tech inefficient
3. Consumer
inefficient
4. Productively
inefficient
25%
25%
25%
25%
1
2
3
4
My neighbor keeps his dog tied at the corner of his yard
where his house meets a fence. The dog is on a 50-foot
leash and therefore can run anywhere within the region
defined by the leash, the fence and the house.
An economy may operate outside the
Production Possibility Frontier if:
1. It is not utilizing its
resources fully
2. It is being
productively efficient
3. It is a mixed economy
4. It is trading with
other economies
25%
25%
25%
25%
1
2
3
4
An outward shift of the production
possibility frontier may be caused by:
1. An increase in
demand
2. More government
spending
3. Better training of
employees
4. Productive
inefficiency
25%
25%
25%
25%
1
2
3
4
"Reality" is what we take to be true. What we
take to be true is what we believe. What we
believe is based upon our perceptions. What we
perceive depends on what we look for. What we
look for depends upon what we think. What we
think depends upon what we perceive. What we
perceive determines what we believe. What we
believe determines what we take to be true.
What we take to be true is our reality.
Gary Zukav, The Dancing Wu Li Masters: An Overview of the New Physics (New York: Bantam Books, 1980), p. 310
Positive and Normative Statements
Positive Economic Statement – A statement
that can be proved or disproved by reference to
facts
Ex. : The U.S. unemployment rate is 5.1%
Normative Economic Statement – A
statement that represents an opinion, which
cannot be proven or disproved
Ex. : The U.S. unemployment rate should
be lower
"The Consumer Price Index increased
by 4.2 percent in the first quarter of
this year." What type of statement is
this?
1. Positive
2. Normative
50%
1
50%
2
Which of the following is a normative
statement?
1. the Philadelphia Phillies have won
70 baseball games this year
2. the Consumer Price Index rose
three-tenths of one percent in May
25%
3. in January, the average
temperature in San Diego exceeds
the average temperature in
25%
Minneapolis
4. The New York Yankees need a
better manager
25%
25%
1
2
3
4
Which of the following is a positive
statement?
1. driving speeds should be
lowered so that fewer
accidents will occur
2. when per capita income falls, 25%
fewer meals are consumed at
restaurants
3. the minimum wage is too low; 25%
college students deserve a
raise
4. cigarette sales should be made
illegal in order to reduce the
incidence of cancer
25%
25%
1
2
3
4
"Senior citizens deserve an income
that will allow them to live in comfort
for their remaining years." This is
1. neither a normative nor
a positive statement
25%
2. both a positive and a
normative statement
25%
3. a positive statement
4. a normative statement
25%
25%
1
2
3
4
Review: Determine whether the following
statements are positive or normative statements.
•In a survey of 464 economists, only 6.5%
disagreed with the statement “A ceiling on rents
reduces the quantity and quality of housing
available.”
_____________________
Review: Determine whether the following
statements are positive or normative statements.
•“The distribution of income in the U.S. should
be more equal.”
_____________________
Federal Government Budget
Year One
Year Two
"How do we evolve from year one to year two?"