1.3 The Production Possibilities Model
 Consumer Product
 An item that gratifies people’s needs and wants
 Capital Good
 An item that is used to produce other products
 Production Possibilities Schedule
 A table that shows the possible output combinations for an
economy
 Production Possibilities Curve
 A graph that shows the possible output combinations for an
economy
 A society must
choose among
possible
combinations of
2 goods.
Production
Possibilities
Curve
Production
Possibilities
Schedule
Increasing Opportunity Costs
 Law of Increasing Opportunity Costs (OC):
 The concept that as more of one item is produced by an economy,
the opportunity cost of additional units of that product rises
 You can see OC by moving from point to point along the PPF
 The “bowing-out” shape of the curve shows that as more of
one product if produced, its OC in terms of the other product
increases
 If a town starts if with 10,000 industrial machines (A), it cannot
make any pizzas.
 If the town decides to make 100, 000 pizzas, it can now only
make 9,000 industrial machines (B)
 The opportunity cost the first hundred thousand pizzas is one
thousand industrial machines
 If the town decides to makes
200,000 pizzas, it can now only
make 7,000 industrial machines (C)
 Notice: Opportunity Cost increased
from 1,000 to 2,000 industrial
machines for every 100,000
increase in pizzas
Economic Growth
 Economic Growth
 An increase in an economy’s total output of goods and services
 This can happen due to:
 Rise in amount of available resources
 Improvement in technology
 Both these trends
cause an outward shift in
the PPF, thus, the amount
of feasible output
combinations expands
Economic Contraction
 Just as an economy can grow, it can contract as well
 This can happen because:
 A society’s output of goods and services falls
 Drop in amount of available resources
 Explaining the reasons for economic growth and contraction is
one of the main topics in macroeconomics
EXAMPLE
 Computers – Capital Good
 Hamburgers – Consumption Good
 How does a society’s choice between the two affect the
position of its future PPF?
 By choosing to produce more capital goods
relative to consumption goods, a society can
increase the amount of available resources
 Important to focus on capital resources to
achieve good rates of economic growth in a
country
 PPF Curve would shift outwards