UNIT
MICRO
1
Basic
Economics
Concepts
The Production Possibilities Curve
Model:
In this Module, you will learn
to:
Summarize the crucial role of models as simplified
representations of economic realities
Explain how the production possibilities curve graph
illustrates necessary trade-offs
Describe what the production possibilities curve model tells
us about scarcity, efficiency, and opportunity cost
Explain how changes in technology and the availability of
resources influence economic growth and the production
possibilities curve
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The Production Possibilities Curve Model:
The Use of Models in Economics
In 1901, the Wright brothers built a wind tunnel. This apparatus let them
experiment with different designs for wings and control surfaces.
Today, pilots train with flight simulators and cockpit models that allow
them to practice maneuvers without ever leaving the ground.
Models are simplified representations of reality that play a crucial role
in almost all scientific research, economics included.
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The Production Possibilities Curve Model:
Trade-offs: The Production Possibilities Curve
Alexander Selkirk was a castaway on a deserted island off Chile in 1704.
With limited resources, Selkirk essentially became a
one-person economy.
Every day, he chose whether to fish, find coconuts, build shelter,
or look out for rescue ships.
These trade-offs meant an hour spent doing one thing was an hour
that could not be spent doing another.
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The Production Possibilities Curve Model:
Trade-offs: The Production Possibilities Curve
Both A and B are efficient—
This PPC showsoccurs
A trade-off the trade-
when all available resources are
off
youbetween
give up coconut
one thingand
to fish
get Quanti used.
ty
production.
something else. of Productio
The production coconu n
possibiliti
ts
3
Atpossibilities
point A, 20 fish curve
and 15 0 es curve
(PPC)
coconuts are produced.
(PPC) shows the trade- Feasible and
offs
The facing an economy
PPC shows the that productively
efficient
At point B,only
produces
maximum 28 fish
two
quantity and 9
of one 1
A
coconuts
good thatare
goods. canproduced.
be produced
5
for each possible quantity 9 B
Every point along the
of the other.
PPC is both feasible and
0 2 2 4
efficient. © 2023 BFW Publishers
0 8 0
Quantity
of fish
The Production Possibilities Curve Model:
Trade-offs: The Production Possibilities Curve
Quanti
Points to the left
right of the
of the PPC ty
are
PPC are not feasible.
feasible but They of
coconu
exceed available resources.
inefficient—not all ts3 D
0
resources are being used.
Not
feasible
At point D,
C, 20
40 fish and 930 1 A
coconuts are produced.
would be produced 5
—but this production level is 9 C B
impossible. Feasible,
but
inefficie
0 nt 2 4 Quantity
0 0
© 2023 BFW Publishers of fish
The Production Possibilities Curve Model:
Efficiency
An economy is efficient if there are no missed opportunities—meaning
that there is no way to make someone better off without making at least
one person worse off.
An economy achieves productive efficiency if it produces at any
point on its production possibilities curve.
An economy achieves allocative efficiency if it produces at the
point along its production possibilities curve that makes consumers as
well off as possible.
© 2023 BFW Publishers
The Production Possibilities Curve Model:
Opportunity Cost
The PPC is a useful reminder that the true cost of anything is
not just its price, but everything in addition to money that must
be given up in order to get it—the opportunity cost.
On a deserted island where each fish caught means a certain
number of coconuts cannot be harvested, the opportunity
cost of each fish is measured in coconuts given up.
© 2023 BFW Publishers
The Production Possibilities Curve Model:
Opportunity Cost
This PPC shows the Quantit
increasing of
y
Producing the …requires giving
up only 5
opportunity cost coconu35
ts
first
20 fish . . . coconuts
of producing fish in 3
0
But
producing
terms of coconuts lost. 2
5
A 20 more
fish . . .
The concave or 0
1
…requires giving
up
bowed-out shape of 5
1
25 coconuts.
the PPC reflects an
0
5
increasing opportunity P
P
cost. 0
© 2023 BFW Publishers
1
0
2
0
3
0
4 5
0 C Quantity
0
of fish
The Production Possibilities Curve Model:
Economic Growth
Economic growth is a sustained rise in aggregate output and an
increase in a standard of living.
Economic growth can also be understood as an expansion of an
economy’s production possibilities.
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The Production Possibilities Curve Model:
Economic Growth
After growth,
Production the PPC
initially moves
lies at Quanti
ty
to
A point E (25 fish and 30 of
coconuts).
(20 fish and 25 coconuts).
coconu3
ts
5
3 E
0
The old PPC shifts 2 A
5
outward to a new PPC 2
because production possibilities 0
have expanded. 1
5
New
1 PPC
The economy can now produce 0
more of everything. 5 Original
PPC
0 1 2 2 3 4 5
0 0 5 0 0 0
Quantity
© 2023 BFW Publishers
of fish
The Production Possibilities Curve Model:
Economic Growth
The two main sources of growth are increases in available resources and
improvements in technology.
For example, a person stranded on a deserted island might suddenly discover a new
coconut grove full of low-hanging coconuts. This increase in available
resources (also knows as factors of production) would shift the PPC
outward.
Technology is the technical means for producing goods and services.
For example, a person stranded on a deserted island might discover or build a fishing
net. This improvement in technology would shift the PPC outward.
© 2023 BFW Publishers
The Production Possibilities Curve Model:
Economic Growth
If an economy’s production
possibilities curve shifts
inward, the economy has
become smaller.
This could happen if the
economy loses resources or
technology, which could result
from natural disaster or war.
© 2023 BFW Publishers
The Production Possibilities Curve Model:
Walkthrough: Free Response Question #1
1. Refer to the graph. Assume that the country is producing at point C. a. Does this country’s production possibilities curve
exhibit increasing opportunity costs? Explain. b. Suppose point C is initially the allocatively efficient point for this country,
but then the country goes to war. Before any of the country’s resources are lost in the fighting, which point is the most likely
to be allocatively efficient for the country when it is at war? Explain. c. If the economy entered into a recession, the country
would move from point C to which point? Explain. (6 points)
1 point: The country would choose an
1 point: efficient point with more (but not all) military
Yes goods with which to fight the war. Point A
1 point: The PPC is concave would be an unlikely choice because at that
(bowed outward), so with each point there is no production of any social
additional unit of butter produced, goods, some of which are needed to maintain
the opportunity cost in terms of a minimal standard of living.
gun production (indicated by the
slope of the line) increases.
Likewise, as more guns are 1 point:
produced, the opportunity cost in E
terms of butter increases.
1 point: A recession, which causes
unemployment, is represented by a point below
the PPC.
1 point: © 2023 BFW Publishers
