Production Possibilities Curve, Economic Growth, and Specialization

This presentation provides a comprehensive overview of the Production Possibilities Curve (PPC) and its applications in economics. It begins by introducing fundamental concepts such as scarcity, choice, and opportunity cost, illustrating how these principles shape economic decisions at both individual and societal levels. The presentation then delves into the PPC, explaining how it represents the maximum combinations of goods that can be produced with available resources, given certain assumptions. It explores the concept of economic growth and how it shifts the PPC outward, driven by factors like new technology and increased labor supply. Additionally, the presentation covers specialization, comparative advantage, and the division of labor, demonstrating how these concepts lead to greater productivity and economic efficiency. The 'Guns vs. Butter' analogy is also used to illustrate the trade-offs societies face. The presentation concludes by discussing the trade-off between present and future consumption, and the role of capital goods in economic growth. This presentation provides a solid foundation for understanding core economic principles.

Production Possibilities Curve
Economic Growth and Production
The greatest powerpoint about
production possibilities ever.

We are in a mixed market
economy
• Therefore, we have to make choices
• We must choose how to spend our time, energ
and capital
• We must make a choice on what to study, wha
to eat, when to work
▫ Economics or Calculus
▫ Expensive Food or Cheap Food
▫ Friday night party or Friday night working

Scarcity, Choice,
and Opportunity Cost
• Opportunity Cost
▫ The highest-valued, next-best alternative that
must be sacrificed to obtain something or to
satisfy a want

Scarcity, Choice,
and Opportunity Cost (cont'd)
• Questions
▫ What is the opportunity cost of attending this
economics class?
▫ What is the opportunity cost of attending a
concert by your favorite band?
▫ What is the opportunity cost of increasing
research for an AIDS vaccine?

Scarcity, Choice,
and Opportunity Cost (cont'd)
• In economics, cost is always
a forgone opportunity.

Limited Resources & Unlimited Wants
Scarcity
Choices
Opportunity Cost
Scarcity, Choice,
and Opportunity Cost (cont'd)

Scarcity, Choice, and Opportunity Cost
• Opportunity cost
and a national monument
▫ Allocating land between public and
private use
▫ The trade-off between the use of
land for recreation or for coal
• Question
▫ What does the market value of coal
under the National Monument tell
us about the perceived social value
of the monument?

How to represent opportunity cost
• The production
possibilities curve
(PPC) represents all
possible maximum
combinations of total
output that could
be produced.

PPC - Studying

The Choices Society Faces (cont'd
• Production possibilities assumptions
▫ Resources are fully employed
▫ Production takes place over a specific
time period
▫ Resources are fixed for the time period
▫ Technology does not change over the
time period

The Choices Society Faces (cont'd
• Efficiency
▫ A point along the line when everyone is employ
and all resources are used correctly.

Production
Possibilities Curve (PPC)
• What would happen to the production
possibilities curve if you spent more
time studying?
▫ Let’s say instead of 12, you had 20 hours to
study
• What would happen to your
potential grades?
• What if the subjects overlapped like Engli
and History or Speech

Economic Growth and the Production
Possibilities Curve
• Economic growth
▫ Increases the production possibilities
of the two goods
▫ Occurs over the long run
▫ Is illustrated by an outward shift
of the production possibilities curve

Figure 2-4 Economic Growth Allows
for More of Everything
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Economic Growth
• When the curve
moves out we have
economic growth,
which is caused by:
▫ New Technology
▫ More Labor
▫ More Supply – a
new supply of
gasoline found
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The Choices Society Faces
• PPC is used to demonstrate
related concepts of scarcity,
choice, and trade-offs
▫ At the individual level
▫ At the societal level

Guns vs. Butter

Guns vs. Butter
• Minister of Propaganda Joseph Goebbels stat
"We can do without butter, but, despite all ou
love of peace, not without arms. One cannot
shoot with butter, but with guns." Sometime
the summer of the same year, Herman Göring
announced in a speech, "Guns will make us
powerful; butter will only make us fat."
• Another use of the term was Margaret Thatc
reference in a speech that, "The Soviets put g
over butter, but we put almost everything ove
guns."

The Trade-Off Between
the Present and the Future
• PPC
▫ Can be used to illustrate the trade-off between
present and future consumption
• Consumption
▫ The use of goods and services for personal
satisfaction
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Figure 2-5
Capital Goods and Growth
• Consumer goods
▫ Goods produced for personal
satisfaction
• Capital goods
▫ Goods used to produce other
goods
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We can move along the PPC, or ha
the PPC move out
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Specialization and
Greater Productivity
• Specialization
▫ Organization of economic activity among differ
individuals and regions
▫ Leads to greater productivity
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The Choices Society Faces (cont'd
• In general, the more specialized the resource
the more bowed the PPC
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Specialization and
Greater Productivity (cont'd)
• Absolute Advantage
▫ The ability to produce more units of a good or
service using a given quantity of labor or resour
inputs
▫ Equivalently, the ability to produce the same
quantity of a good or service using fewer units o
labor or resource inputs
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Specialization and
Greater Productivity (cont'd)
• Comparative Advantage
▫ The ability to produce a good or service at a low
opportunity cost
▫ Is always a relative concept
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Consider Michael Jordan and some
random minor league player
• MJ has absolute advantage in basketball, and
maybe baseball, but the minor league player h
a comparative advantage in baseball

• Country A has an absolute
advantage in the production
of both maize and wheat. At
all points its production
possibility curve lies to the
right of that of Country B.
• Now consider the opportunity
cost of Country B producing
one more unit of wheat. Two
units of maize have been
foregone. When Country B
produces one more unit of
wheat only half a unit of maize
is foregone. Fewer resources
are foregone if Country B
specializes in the production
of wheat.
• In the above case Country
A should produce maize
and Country B wheat.
The surpluses produce
should then be traded.

Comparative Advantage
and Trade Among Nations (cont'd)
• When nations specialize where they have a
comparative advantage and then trade with th
rest of the world
▫ Economic efficiency improves
▫ Output increases
▫ Average standard of living rises
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Division of Labor
• Rational individuals choose
their comparative advantage
and specialize.
• Specialization leads to division
of labor.
• Theorized by Adam Smith in
Wealth of Nations
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Division of Labor (cont'd)
• Division of Labor
▫ Assigning different workers different tasks to produ
a good or service
▫ Organizing a division of labor within a firm to incre
output
• Examples
▫ Automobile production
▫ Hospital operating room
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