KEY CONCEPTS Production possibilities curve (PPC) is one model (graph)

PPC shows the maximum goods or services that can be produced from limited resources

also called production possibilities frontier

PPC PPC based on assumptions:

resources are fixed all resources are fully employed only two things can be produced technology is fixed

Analyzing Production Possibilities

Graphing the Possibilities

Production Possibilities Curve PPC runs between extremes of

producing only one item or the other

Data is plotted on a graph; lines joining points is PPC shows maximum number of one

item relative to other item PPC shows opportunity cost of

each choice more of one product means less of

the other

What We Learn from PPCs

Efficiency — producing the maximum amount of goods and services possible

Underutilization — producing fewer goods and services than possible

Why is the PPC a Curve?

Law of increasing opportunity costs as production switches from one product

to another, more resources needed to increase production of second product

Reasons for increasing cost of making more of one product need new resources, machines, factories must retrain workers

Costs paid by making less and less of other product

Let’s Look at Some Examples

PPC Practice

Changing Production Possibilities

A country’s supply of resources changes over time Example: U.S. in 1800s grew, gained

resources, workers, new technology new resources mean new production

possibilities beyond frontierIncreased production shown on PPC as shift

of curve outwardIncrease in total output called economic

growth

PPF—The Curve

What Does Guns And Butter Curve Mean? In a theoretical

economy with only two goods, a choice must be made between how much of each good to produce.

As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa. 

Video Clip: Individual and Society PPCs

Text book-pg 20 Q#5-9 PPC Problems

Microeconomics and Macroeconomics

Microeconomics Microeconomics examines specific, individual

elements in an economy prices, costs, profits, competition, consumer and

producer behavior Some Topics of Interest: business organization, labor

markets, environmental issues

Microeconomics and Macroeconomics

Macroeconomics Macroeconomics studies sectors — combination of all

individual units Includes consumer, business, public or government

sectors Macroeconomics studies national or global topics:

monetary system, business cycle, tax policies, international trade

Examples of Macro and Micro

Which is it?1. National Unemployment Figures lower.2. World Trade Organization Meets3. Shipbuilder Wins Navy Contract4. Cab Drivers on Strike!5. Gasoline Prices Jump 25 Cents