Download Production Possibilities Curve/Frontier

ProductionPossibilities
Let us suppose that production in the economy can be divided
into two broad categories. Suppose the economy can produce
either computers or movies. With a scarcity of resources such
as labor (workers) and capital (money for business), there is a
choice between producing some goods, such as computers,
versus other goods, such as movies. The table below gives an
example of the alternative choices, or the production
possibilities, for computers and movies. Each choice, A-F,
leads to different production numbers.
--
Page1
IncreasingOpportunityCost
The opportunity cost of producing more movies is the value of
the computers not produced, and vice versa. The opportunity
cost, in terms of computers, of producing more movies
increases as we require a loss of more and more computers.
What we've just described is called increasing opportunity
costs. Moving from production possibility A to B requires an
opportunity cost of 1,000 computers (25,000 to 24,000), but
moving from production possibility A to C increases the
opportunity cost by additional 2,000 computers (25,000 to
22,000).
Page2
The ProductionPossibilitiesCurve/Frontier
The figure on the right is a graphical representation of the
production possibilities table on the left. We put movies on the
horizontal axis and computers on the vertical axis of the figure.
Mov
ies
.A
0
25,000
B
100
2 ,000
C
200
22.000
D
t
300
18,000
500
13,000
0
,ioo
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---
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--=--==--==-=---_--:::-;
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ciem
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Proou -ri, n pc,.
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The ProductionPossibilitiesCurve/Frontier<cont.)
A production possibilities curve/frontier (PPC/PPF) graphs both
SRAS and LRAS tradeoffs, communicates choices, scarcity, and
opportunity costs . A production possibilities curve/frontier with a
curve indicates increasing/not proportional opportunity costs
anywhere on the line for both items. When moving from point A to
B, to make two computers (0 to 2) requires an opportunity cost of
two bikes (14 to 12). Moving from B to C increases the number of
computers by two (2 to 4) but the opportunity cost is about 3 bikes
(12 to 9). Notice that the changes aren't constant/proportional. The
resources are not easily adaptable between both products.
Impossible/Unattainable
(given
3 Shifters of the PPC
Changes in:
1. technology
2. trade
3. resource quantity
or quality
.G
current
resources)
Jimpossible/expansion
U)
1. full employment
level
,2. full output level
3. natural rate of
unemployment
10
a,
·m
...::.:::
8
s
1. inefficient
2. unemployment
3. contraction
4. recession
4
2
0
0
2
4
6
8
Computers
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"10
The ProductionPossibilitiesCurve/Frontier(cont.)
A production possibilities curve/frontier with a straight line
indicates constant opportunity costs anywhere on the line. The
resources are easily adaptable between both products . If the
PPC/PPF is a straight line, the amount of Y you have to give up to
make one more X is the same everywhere , and the amount of X
you have to give up to make one more Y is the same 3evervwhere
Shiftei-s of the PPC
aS Well.Good
A
Changes in:
1. technology
I
d60 -- -----------·
200
!
140
0
1. full employment level
2. trade
2. full output level
3. resource quantity
or quality
3. natural rate of unemployment
I
I
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__________ _.___ _
~
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I
1. inefficient
•I
,
t
2. unemployment----_:_ ____ _
•
3. contraction :
:
I
4. recession
•I
I
I
I
........._
.............
-----:lll""'E'"""' .............._________________________
.,
impossible/expansion
...........................................
.;;......... .....
Good
Page5
B
The ProductionPossibilitiesCurve/Frontier(cont.)
This means that the production of goods X and Y uses
resources that are perfect substitutes for each other. Below, for
every increase of 30 of good B, there is a decrease of good A
by 60. For every increase of good A by 60, there is a decrease
of good B by 30. Both goods have constant opportunity costs.
Goo d A
1. full employment level
2. full output level
3. natural rate of unemployment
/
3 Shifters of the PPC
Changes in:
1. technology
2. trade
3. resource quantity
or quality
,6C>--- -----------~
200
I
I
I
I
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---------- ,•---1. inefficient
1 40
:
2. unemployment~-----3. contraction
•
I
I
4. recession
I
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~---:
-
"'-impossible/expansion
I
I
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I
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I
0 .........................................................................
..-r" ..........................................................
_
____,.. .............................................
_"""'P
Good
Page6
B
The ProductionPossibilitiesCurve/Frontier(cont.)
Depending on where an economy is during its economic
fluctuations /business cycle, this determines the location of the
dot. On either line indicates efficient or production efficient
(the maximum amount that can be produced with the available
resources at that time). On either line also indicates full use of
resources, full employment in an economy, peak efficiency,
real GDP (Y) equaling potential, andusually social or
allocative efficiency (when the resources in a society are being
optimally distributed, taking into account all costs and
benefits).
Im poss
14
i b le/U
(given
A
·al
4
2
o
level
7'2. full output level
3. natural rate of
unemployment
1. inefficient
2. unemployment
3. contraction
4. recession
0
2
4
6
Comp
Page7
le
Good
1. full employment level
2. full output level
. na ral rate of unemplo yment
A
.G
8
6
nab
resources)
1. full employment
10
G)
..::.:::
nattai
Jimpossible /expansion
12
en
current
8
u ters
10
!
200
140
t
impostbie /expansion
~
1. inefficient
:
-2.-unemplo-ym ent ~- - - - 3. contraction
4. recession
o---------
60 ._.
e
A
.
:
.••
.·-------------
90
Good
B
The ProductionPossibilitiesCurve/Frontier(cont.)
To the left of the line indicates unemployment, contraction of
the economy, under production, possible labor force reduction
and recession and inefficiency because the economy can
produce a larger number. Points inside the production
possibilities curve/frontier, like Hand B, are possible, but they
are inefficient.
14
(given current resources)
A
lmpossible/expansion
.G
12
U,
1. full employment
10
C1)
~8
·m
1. full employment level
2. full output level
3. nat ral rate of unemployment
Good A
6
l. inefficient
4
2. unemployment
3. contraction
4. recession
level
2. full output level
3. natural rate of
unemployment
D
/
e
200
!
impossible /expansion
•
T iiiCffiCieiit
___,
2. unemployment :
".J.
.-....
140 -~·-CQUv.JlC
_f lQU ___ 1.I ____
•
I
4 . recession
,
2
I
E
2
4
6
8
10
Computers
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~. A
r'\
_
:
I
I
0
0
'
0------------- 60
90
....Good B
The ProductionPossibilitiesCurve/Frontier(cont.)
Anything to the right of the line indicates LRAS expansion,
over production, and an impossibility because the economy
does not have the resources at that time to produce those
quantities. Based on a comparison of points A-E, the
opportunity cost of an making an additional computer is
highest at E since it is the largest amount of computers made
with the largets amo11ntof bikes lost.
14
(given current resources)
A
1. full employment level
2. full output level
Good A
/mpossible/expansion
12
U,
•
10
G
G)
·al
~8
6
4
2
o
1. inefficient
2. unemployment
3. contraction
/·
'
1. full employment
level
2. full output level
natural rate of
unemployment
200
I
+
140
4. recession
E
•
1. inefficient
possible/expansion
2. unemployment I:
-3.-eontr-ac-tion- - - ~ - - - - 4. recession
'
:
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I
I
0
I
0
2
4
6
8
10
Computers
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""-• A
1
I
o---------------
I
60
90
Good B
The ProductionPossibilitiesCurve/Frontier?s
>-G
0 Eooz
ci 2
10
9 ---------,-----
I
1
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4
0
---------
I
:-----'------1
:
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5
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12 GOODX
(U ITS)
1. The opportunity cost of moving production from
point R to point T is
(A) one unit of Good Y
(B) five units of Good Y
(C) six units of Good Y
(D) three units of Good X
(E) seven units of Good X
Page10
The ProductionPossibilitiesCurve/Frontier?s
>-G
0 Eooz
ci 2
10
9 ---------,-----
I
1
I
I
I
I
I
I
I
4
0
---------
I
:-----'------1
:
I
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I
5
8
12 GOODX
(U ITS)
1. The opportunity cost of moving production from
point R to point T is
(A) one unit of Good Y
(B) five units of Good Y
six units of Good Y
(D) three units of Good X
(E) seven units of Good X
(~
Page11
The ProductionPossibilitiesCurve/Frontier?s
2. If a country's production pos ibilities curve is
hifting outward, which of the following must
be true?
(A) There is cyclical unemployment.
(B) The price level is increa sing.
(C) The aggregate demand curve i hifting to the
right .
(D) The long -run Phillip curve is shifting to the
right.
(E) The long -run aggregate supply curve is
shifting to the right.
17. When an economy producing two goods is
operating efficiently and at full employment,
increasing the production of one good will
result in
(A) an inward shift of the production pos ibilities
curve
(B) an outward hift of the production
po sibilitie curve
(C) a decrease in the amount of the other good
that can be produced
(D) an increase in the co ts of both goods
(E) an increa e in the amount of resources
available
Page12
The ProductionPossibilitiesCurve/Frontier?s
2. If a country's production pos ibilities curve is
hifting outward, which of the following must
be true?
(A) There is cyclical unemployment.
(B) The price level is increa sing.
(C) The aggregate demand curve i hifting to the
right .
(D) The long -run Phillip curve is shifting to the
right.
- ) The long -run aggregate supply curve is
shifting to the right.
17. When an economy producing two goods is
operating efficiently and at full employment,
increasing the production of one good will
result in
(A) an inward shift of the production pos ibilities
curve
(B) an outward hift of the production
po sibilitie curve
a decrease in the amount of the other good
that can be produced
(D) an increase in the co ts of both goods
(E) an increa e in the amount of resources
available
ce)
Page13
The ProductionPossibilitiesCurve/Frontier?s
1. Which of the following is always true of an
economy operating on it production possibilitie
frontier?
(A) It re ource are fully employed .
(B) It i allocatively efficient.
(C) It cannot trade with other nation becau e it
i the mo t efficient producer of tradeable
goo d .
(D) It will nece sari ly operate on the same fron tier the following year.
(E) It must be a com mand eco nom y.
36. Which of the following would shift a country'
production po ibiliti es curve inward?
(A) A reduction in the country' infl ation rate
(B) A reduction in the co untry' real intere t rate
(C) A reduction in the size of the country's labor
force
(D) An incre ase in the typical retirement age in
the country
(E) An incr ea e in the country' cyclical
unemploym ent rate
Page14
The ProductionPossibilitiesCurve/Frontier?s
1. Which of the following is always true of an
economy operating on it production possibilitie
frontier?
(e ) It re ource are fully employed .
(B) It i allocatively efficient.
(C) It cannot trade with other nation becau e it
i the mo t efficient producer of tradeable
goo d .
(D) It will nece sari ly operate on the same fron tier the following year.
(E) It must be a com mand eco nom y.
36. Which of the following would shift a country'
production po ibiliti es curve inward?
(A) A reduction in the country' infl ation rate
(B) A reduction in the co untry' real intere t rate
(e ) A reduction in the size of the country's labor
force
(D) An incre ase in the typical retirement age in
the country
(E) An incr ea e in the country' cyclical
unemploym ent rate
Page15
The ProductionPossibilitiesCurve/Frontier?s
54 . For an econo111
y that i operating in id· it
producti n po ibiliti curv which of th
fa llowi ng i tru ?
A It can incr a th production of both good .
B It popul ation i growing fa t r than th
con rny ~ abili ty to incr a · production.
C It is u ing all availabl r sources effici ntly.
D It cannot snov to a point nth production
po ibiliti curv with availabl
tec hno lo1gy.
E It la k th r ourc to incr a pr du tion
yond it curr nt output.
Page16
The ProductionPossibilitiesCurve/Frontier?s
54 . For an econo111
y that i operating in id· it
producti n po ibiliti curv which of th
fa llowi ng i tru ?
e
B
C
D
E
Page17
It can incr a th production of both good .
It popul ation i growing fa t r than th
con rny ~ abili ty to incr a · production.
It is u ing all availabl r sources effici ntly.
It cannot snov to a point nth production
po ibiliti curv with availabl
tec hno lo1gy.
It la k th r ourc to incr a pr du tion
yond it curr nt output.
Macroeconomics
Do-Now
Please do this:
1. Draw two graphs.
a. one showing an economy in contraction/recession
b. one showing an economy in expansion/inflation
2. Draw a production possibilities graph/frontier that shows
not constant/not proportional/increasing opportunity
costs.
i. Show a point that represents fully employed and
efficiently resources and label it A.
ii. On your graph in 2i, label as B a point representing a
•
recession.
3. Create a production possibilities graph/frontier that shows
constant/proportional/no increasing opportunity costs between
goods C and D. Put D on the vertical line.
i. Which one, C or D, has increasing opportunity costs? Explain.
ii. On the same graph, draw what what would happen to the graph if
good D was able to increase in production.
Page18
Macroeconomics
Do-Now
0
~
•
Page19
The ProductionPossibilitiesCurve/Frontier-?s
U)
0
0
0
0
...1
~
0...
<(
u
57. Th e diagra,n ab ove s ho w s thr ee prcx:luct io n
poss ibiliti es c ur ves (PPC s) . If th e cun ·e nt PP C is
PP C 1, w hi ch of th e fo llowing chan ges indi ca tes a
recess io n ?
(A )
(B )
(C)
(D )
(E)
Page20
M ove m e nt frorn po int X to point
M ove m e nt from po int Y to poi nt
M ove m e nt fr om point Y to point
Shift from PP C 1 to PP C 0
M ove m e nt fr om point Z to point
Y
X
Z
X
The ProductionPossibilitiesCurve/Frontier-?s
U)
0
0
0
0
...1
~
0...
<(
u
57. Th e diagra,n ab ove s ho w s thr ee prcx:luct io n
poss ibiliti es c ur ves (PPC s) . If th e cun ·e nt PP C is
PP C 1, w hi ch of th e fo llowing chan ges indi ca tes a
recess io n ?
(A ) M ove m e nt frorn po int X to point
(B ) M ove m e nt from po int Y to poi nt
M ove m e nt fr om point Y to point
(D ) Shift from PP C 1 to PP C 0
(E) M ove m e nt fr om point Z to point
<e)
Page21
Y
X
Z
X
The ProductionPossibilitiesCurve/Frontier?s
2. Any point in ide a production pos ibilities
.
curve 1
(A) better than points on the production
po sibilitie curve
(B ) allocati vely efficient but technolo gically
inefficient
(C) as ociated with inefficient u e or
unemployment of ome resource
(D) as ociated with movement s alon g the
produ ction po sibiliti es curve
(E) as ociated with constant opportunity co ts
38. Which of the following concept can be illu trated
u ing the production po ibilitie curve?
I.
II.
III .
IV .
Choice
Scarcity
Price level
Opportunity cost
(A) II only
(B ) I and III only
(C) III and IV only
(D) I, II and IV only
(E) IT Ill , and IV only
Page22
The ProductionPossibilitiesCurve/Frontier?s
2. Any point in ide a production pos ibilities
.
curve 1
(A) better than points on the production
po sibilitie curve
(B ) allocati vely efficient but technolo gically
inefficient
as ociated with inefficient u e or
unemployment of ome resource
(D) as ociated with movement s alon g the
produ ction po sibiliti es curve
(E) as ociated with constant opportunity co ts
ce)
38. Which of the following concept can be illu trated
u ing the production po ibilitie curve?
I.
II.
III .
IV .
Choice
Scarcity
Price level
Opportunity cost
(A) II only
(B ) I and III only
(C) III and IV only
(e ) I, II and IV only
(E) IT Ill , and IV only
Page23
The
Production
Possibilities
Curve/Frontier?s
2. Assurne that the country of Fischerland produces only consumer goods and capital goods.
APrTAL GOOD
(a) The graph above shows the prcxiuction possibilities curve for Fischerland. The production of which of the
following exhibits increasing opportunity costs: conswner goods only, capital goods only, both gocxis, or
neither good?
(b) Redraw the graph given above. Show a point that represents fully e1nployed and efficiently used resources
on the redrawn graph and label it A.
(c) Assume there is a recession in FischerJand. On your graph in part (b), label as Ca point representing the
recess ton.
(d) Identify a fiscal policy action that the Fischerland goverrunent can take to address the recession.
(e) Assutne instead that no discretionary policy actions are taken. Will short-run aggregate supply increase,
decrease, or ren1ain the satne in the long run? Explain.
Page24
The Production
Possibilities
Curve/Frontier?s
+ + + +
5 po int s (1
1
1
1
1)
CAPITAL GOODS-
(a) 1 point:
•
One point is earned for answering
both goods .
(b) 1 point :
•
One point is earned for showing
p oint A on the production
possibilities
curve .
One point is earned for showing
p oint C inside the pr oductio n possibilities
(c) 1 point :
•
curve .
(d) 1 point:
•
One point is earned for identifyi n g an expansionary
government spending or decreasing truces .
fiscal pol icy , such as increasing
(e) 1 point:
•
One point is earned for stating that SRAS will increase
p roduction costs de crease duri n g a recession.
Page25
because
wages and some other
Macroeconomics
Do-Now
Please do this:
1. The graph below (A) shows the production possibilities curve for
Monopolyland. The production of which of the following exhibits
increasing opportunity costs: consumer goods only, capital goods only,
~oth goods) or neither good? Show an increase in good X.
2. The graph below (B) shows the production possibilities curve for
Monopolyland. The production of which of the following exhibits
increasing opportunity costs: consumer goods only, capital goods only,
both goods, or (neither good}' Show an increase in good Y.
X
@
Page26
X
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