Transcript The Economic Way of Thinking

Analyzing Production Possibilities
 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

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 frontier
 Increased production shown on PPC as shift of curve
outward
 Increase 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.
2.
3.
4.
5.
National Unemployment Figures lower.
World Trade Organization Meets
Shipbuilder Wins Navy Contract
Cab Drivers on Strike!
Gasoline Prices Jump 25 Cents