OPPORTUNITY COST AND THE PRODUCTION POSSIBILITIES...
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Economics- The Final Frontier OPPORTUNITY COST AND THE PRODUCTION POSSIBILITIES FRONTIER Mr. Cline Marshall High School Economics Unit Two AA
Transcript of OPPORTUNITY COST AND THE PRODUCTION POSSIBILITIES...
Economics- The Final Frontier
OPPORTUNITY COST AND THE
PRODUCTION POSSIBILITIES FRONTIER
Mr. Cline Marshall High School Economics Unit Two AA
* What We Look For in the New Frontier
• Whenever something is scarce, we have to learn how to parcel it out, and that requires some sort of decision, some sort of choice.
• Rational choice, or considering the consequences and actions of alternatives then making the choice that gives you the most satisfaction, requires you to consider the opportunity cost.
• Opportunity cost is the best alternative foregone when a choice is made. The opportunity cost of what you choose is what you give up to get it.
• Efficiency is doing the best you can with what you have, or making the largest
quantity of output possible with your given quantity of inputs. The definition of efficiency is doing the best you can given a limited amount of resources.
• Suppose we have an economy that produces two products; wheat and rice.
Efficient behavior would be for the economy to produce as much wheat as it could, given a specific quantity of rice. That is, using the largest quantity of resources available that are not producing rice, to produce wheat, thereby getting the largest possible quantity of both commodities. This is what is meant by efficiency, getting the most you can out of your limited quantity of resources.
* The Production Possibilities Table
• Now in our hypothetical economy where the only outputs are either wheat or rice, we can now determine what the production possibilities for these outputs are. Production Possibilities are a combination of output that can be produced with available resources.
• The first thing you may want to know are what resources are available in this
economy with which to produce our given outputs. We will need land, of course, but is the land available wet, or dry, how much arable land is there, what kind of labor is available in this economy, what kind of tools, are there tractors and combines, or hand plows, shovels and hoes?
• The first thing you want to know, when you want to describe the production
possibilities of an economy, is what is the resource in doubt in that economy? • How much land labor and capital is there to work with?
* The Production Possibilities Table
• The second thing you will want to know is what are the capabilities of this economy given these resources, or what are the strategies this economy has for combining inputs to produce output? We call that the economy’s technology.
• To an economist technology is a complete catalog of all of the things an economy knows how to do.
• A technique is a particular combination of inputs but a technology refers to all of the possible combinations of resources that the economy can use to produce a given output.
• When technology improves this means that you can usually produce more output with less input because you are using this input in a smarter way.
• Once you know the resources of an economy, you can then formulate the
production possibilities of that economy. The following table represents the production possibilities of our hypothetical economy.
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
• Every combination of numbers on this chart represents an efficient combination.
• That is if our economy uses all of its resources wisely it can produce 80 bushels of wheat a year, but since all of the resources are devoted to wheat production, there would be no rice production in this case.
* The Production Possibilities Table
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
• If we dedicate the best resources of producing rice (wet lands, specialized tools, cheap labor, etc.) to producing 20 bushels of rice, we can still produce 78 bushels of wheat.
• Notice that the production of wheat decreases as we move resources into the production of rice. But, since we are moving first those resources best suited for the production of rice we can get a large increase in rice production for only a small decrease in wheat production.
* The Production Possibilities Table
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
• For the cost of 8 bushels more of wheat per year, we can produce 20 more bushels of rice, and so on, until, if we put all of our resources in to producing rice each year we would get 100 bushels of it, but none of wheat.
• So, the production possibilities table represents those efficient combinations of
production that are possible given the economy’s technology and given the economy’s resource endowment.
* The Production Possibilities Table
• Now lets represent the production possibilities graphically in a diagram. This diagram is
called the Production Possibilities Curve or the Production Possibilities Frontier (PPF). • The first thing you will want to do is label your axes. We will call the vertical axes
“WHEAT” and it will represent the number of bushels of wheat we can grow in a given year. The horizontal axis will be “RICE” and it will represent the number of bushels of rice we can grow in a given year.
* The Production Possibilities Curve
WHEAT
RICE
• We will then want to calibrate the axes by placing numbers on them to tell us how things are measured. Since we will be going up to 80 bushels of wheat, lets use each hash mark on the vertical axis as representing 20 bushels of wheat. Then we will do the same with the horizontal axis for rice.
* The Production Possibilities Curve
WHEAT
RICE
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
80
60
40
20
0
0 20 40 60 80 100
• Now we can plot the points on the curve in the diagram by plotting the combinations shown on our table. First would be 80 bushels of wheat, and no bushels of rice, and then 78 bushels of wheat and 20 bushels of rice, and so on until we have plotted each possibility.
* The Production Possibilities Curve
WHEAT
RICE
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
80
60
40
20
0
0 20 40 60 80 100
• Now, these points, of course, are not the only possibilities of wheat and rice production. In fact we can imagine an economy where it shifts back and forth with the production of wheat increasing as rice decreases, and vice versa. If we plotted all of the possible points, they would lie between those shown in the diagram, and if we connect the dots, then we would arrive at our Production Possibilities Curve or PPF.
* The Production Possibilities Curve
WHEAT
RICE
WHEAT RICE
80 0
78 20
70 40
55 60
38 80
0 100
80
60
40
20
0
0 20 40 60 80 100
• The Production Possibilities Frontier represents the various combinations of output that an economy can produce given that economy’s technology and resource endowment.
• We can see a lot of economic concepts in this curve. For example, not all of the
production possibilities are shown here. How about 80 bushels of each, which would be nice. However, since it is outside of the curve it is unattainable, reminding us of the affects of scarcity given the resource endowment, the amount of land, labor and capital, and the technology that is available to us in this economy, this point is unattainable.
* The Production Possibilities Curve
