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3 Basic Questions a Society Must Face Production Possibilities • Production Possibilities curve – a diagram representing various combinations of goods and/or services an economy can produce when all productive resources are fully employed. •What is the opportunity cost of scoring a 75% on the calculus test? The most famous PPC example MILITARY V. CIVILIAN A Two-Product Farmer’s Possible PPF • Why is the yellow area inefficient production? • Why is the white area unattainable production? • What would have to happen to move into the white area? What are… •CAPITAL GOODS? •CONSUMER GOODS? 1 Lessons in Specialisation: • It’s about efficiency, not quantity! • Should Angola and Botswana produce both potatoes and shoes? What can we learn from the PP Model? The Production Possibility model provides valuable lessons in: • Opportunity Cost • Specialisation • Trade Theory • Resource Utilisation & Efficiency • Full Employment Note: Opportunity Cost is usually not limited to just 1 other option From nationalpriorities.org -- the cost of the war in Iraq > $600 billion spent (Feb 2009) Possible Opportunity Costs: >90 million kids attending head start programs >193 million people w/ health care for 1 year >10.7 million additional teachers for 1 year >5.1 million additional housing units >101 million full 1 year university scholarships
