SSEF2a: Illustrate by means of a production possibilities curve the trade-offs between two options.

A graph that show alternative ways to use an economy’s resources

Axes can show categories of goods and services◦ Guns and Butter◦ Factory goods and Farm goods

Can also display any pair of specific goods or services ◦ Hats on one axis◦ Shoes on the other

Production Possibilities Curve

First decide what goods or services are to be examined

Graph A Graph B

Drawing a Production Possibilities Curve

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Butter

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Guns Guns

No Butter , all possible Guns

No Guns, all possible Butter

Graph A indicates that they could produce 15 Million Guns if it used all of its resources to produce Guns

Graph b indicates that they could produce 20 million Tons of butter

So KT’s country can produce a maximum of:15 Million Guns

Or20 Million Tons of Butter

KT’s Country

The citizens of Kt’s Country could produce both Guns and Butter

The Graph below show six different ways that KTlanders could use their resources to produce Guns and Butter.

Third Choice

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Guns

The Line is called the Production Possibilities frontier.

Any spot on that line represents a point at which Kt’ Country is using all of its resources to produce a maximum combination of those two products

Near the top (points a and b) Gun factories produce more Guns, but farmers produce fewer tons of Butter

As you go down the line, farmers are producing more butter, but less guns are being manufactured

Trade-Off

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Why?

Because LAND, LABOR, and CAPITAL are scarce

Using the factors of production to make more product means that fewer resources are left to make something else

Production possibilities graphs can show ◦ 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, Growth, and Cost

Efficiency means using resources in such a way as to maximize the production or output of a good or service.

Efficiency

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Sometimes economies operate inefficiently

Example:

What would happen if some farmers and factory workers were laid off?

The farms and factories would produce fewer goods. This trade off is represented by drawing a point INSIDE the Production Possibilities frontier

A production possibilities curve reflects the country’s current production possibilities as if the country’s resources were frozen in time.

But in the real world countries are constantly changing

If the quantity or quality of available land, labor, or capital changes, then the curve will move

Growth

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Example:

If immigrants pour into this country, then more labor becomes available. The maximum amount of goods that the nation can produce increases

New inventions can allow workers to produce more goods at lower costs.

Cost is the alternative we give up when we choose one option over the other

Cost

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The cost of moving from producing no Butter to producing 8 million tons of butter is 1 million pairs of Guns

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20,5 If we decided to produce 14 million tons of butter (an increase of only 6 million) it costs 2 million pairs of Guns