Slide 1Copyright © Pearson Education, Inc.Chapter 1, Section 3

Chapter Essential Question• How can we make the best economic choices?

Ch 1.3: Production Possibilities CurveCh 1.3: Production Possibilities Curve

Slide 2Copyright © Pearson Education, Inc.Chapter 1, Section 3

ObjectivesObjectives

1. Interpret a production possibilities curve.

2. Explain how production possibilities curves show efficiency, growth, and cost.

3. Explain how a country’s production possibilities are impacted by technology/training/education.

Slide 3Copyright © Pearson Education, Inc.Chapter 1, Section 3

Production PossibilitiesProduction Possibilities

• Economists often use graphs to analyze the choices and trade-offs that people make.

• A production possibilities curve is a graph that shows alternative ways to use an economy’s productive resources.– To graph the curve, we must decide which

goods or services are the alternatives

Slide 4Copyright © Pearson Education, Inc.Chapter 1, Section 3

Production Possibilities CurveProduction Possibilities Curve• Table shows 6 combinations of watermelons and shoes that

could be produced if we used all of our factors of production

Slide 5Copyright © Pearson Education, Inc.Chapter 1, Section 3

Production Possibilities FrontierProduction Possibilities Frontier

• The line on a production possibilities curve that shows the maximum possible output an economy can produce is called the production possibilities frontier.– Each point on the production possibilities frontier

reflects a trade-off (watermelons vs. shoes).

– These trade-offs are necessary because factors of production are scarce.

– Using land, labor, and capital to make one product means that fewer resources are left to make something else.

Slide 6Copyright © Pearson Education, Inc.Chapter 1, Section 3

Production Possibilities: EfficiencyProduction Possibilities: Efficiency• A production possibilities frontier represents

an economy working at its most efficient level.– Maximum potential from factors of production– No waste /slack/laziness/inefficiency– On the line is where we are most efficient

• Sometimes an economy works inefficiently and it uses fewer resources than it is capable of using. This is known as underutilization.

Slide 7Copyright © Pearson Education, Inc.Chapter 1, Section 3

• Technology can increase a nation’s efficiency.

• Many governments spend money investing in new technology, education, and training for the workforce (financial aid, GI bill, tax breaks)

• Increases in human capital lead to increased efficiency

• Technology and education can increase economy’s production possibilities

Production Possibilities: Efficiency and Technology/EducationProduction Possibilities: Efficiency and Technology/Education

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Production Possibilities: Efficiency and Technology/EducationProduction Possibilities: Efficiency and Technology/Education

Slide 9Copyright © Pearson Education, Inc.Chapter 1, Section 3

• A production possibilities curve can also show growth.

- growth increases output for all alternatives.

– When an economy grows, the curve shifts to the right.

– However, when an economy’s production capacity decreases, the economy slows and the curve shifts to the left.

• This is inverse of growth

Production Possibilities: GrowthProduction Possibilities: Growth

Slide 10Copyright © Pearson Education, Inc.Chapter 1, Section 3

• Production possibilities curves show the opportunity costs involved in a production decision.– Cost increases as production shifts from making one item to

another.

– The law of increasing costs helps explain the production possibilities curve.

• Opportunity cost is most desirable alternative given up.

• As we move along the curve, we trade off more and more for less and less output.

• If we make more shoes, we produce less and less watermelons

Production Possibilities: CostProduction Possibilities: Cost

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Production Possibilities: CostProduction Possibilities: Cost

Slide 12Copyright © Pearson Education, Inc.Chapter 1, Section 3

Production Possibilities: Law of Increasing CostsProduction Possibilities: Law of Increasing Costs

Slide 13Copyright © Pearson Education, Inc.Chapter 1, Section 3

ObjectivesObjectives

1. Interpret a production possibilities curve.

2. Explain how production possibilities curves show efficiency, growth, and cost.

3. Explain how a country’s production possibilities are impacted by technology/training/education.

Shows tradeoffs between two alternatives. Forced to choose bcs of scarce resources. PPF shows production under full use of resources

On the line: efficiency (no waste, max use); underutilized under PPFGrowth shifts to right – more productionCost shifts to left – less production

Increases human capital -> leads to growth -> PPF shift right, more production

Slide 14Copyright © Pearson Education, Inc.Chapter 1, Section 3

Key TermsKey Terms

• production possibilities curve: a graph that shows alternative ways to use an economy’s productive resources

• production possibilities frontier: a line on a production possibilities curve that shows the maximum possible output an economy can produce

• efficiency: the use of resources in such a way as to maximize the output of goods and services

Slide 15Copyright © Pearson Education, Inc.Chapter 1, Section 3

Key Terms, cont.Key Terms, cont.

• underutilization: the use of fewer resources than an economy is capable of using

• law of increasing costs: an economic principle which states that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service