Section 1: Basic

Economic Concepts
Module 3
The Production Possibility
Curve
1
 Government of Sharjah ‫حكومــــــــــة‬
Sharjah Private Education Authority ‫الشارقـــــــــة‬
Al Rushed American Private School ‫هيئة الشارقة للتعليم‬
‫الخاص‬
‫مدرسة الرشد األمريكية‬
Subject: AP Microeconomics ‫الخاصة‬

Week/ Term: Week 4/ Term 1

Standard: MKT 1.C: Identify an economic concept, principle, or model
using quantitative data or calculations.

Section 1/ Lesson 3: Basic Economic Concepts/ The

Production Possibility Curve
Objective/Learning Target: By the end of the Session To be able
to
1. (Day 1): Identify, Define, and graph the PPC.
2. (Day 2): Define, compare, and create a flow chart of PPC.
3. (Day 3): Read, differentiate, and create the PPC w.r.t.
Economic Growth.
What’s in this Module…………………..

3
Keywords • Other things equal
(ceteris paribus)
assumption Trade-off
• Production possibilities
curve
• Efficient
• Technology
• Trade
• Gains from trade
Specialization
• Comparative
advantage Absolute
What you will learn in this Module:

1. Trade-offs are
important in
economic analysis
2. The production
possibilities curve
model reveals
about the
economy
(efficiency,
opportunity cost,
and economic
growth)
3. 2 sources increase
economic growth:
increased
availability of
resources and
improvements in
technology
5
Trade Offs & the Production Possibility Curve

• Trade off:
• what you give up in order to have
something else…why? You cannot have
everything!
• Production possibility curve:
• Illustration that shows the trade offs in an
economy for 2 products. It shows the max
quantity of a good that can be produced
for each possible quantity of the other.
• Why is this important?
• The PPC model improves understanding
of trades offs in a simplified manner
6
The Production Possibilities Curve

1. Assumptions:
Available supply
of resources is
fixed in quantity
and quality at
this point in
time.

2. Technology is
constant during
analysis.

3. Economy
produces only
two types of
products.
What Information is Received from a PPC?

1. PPC shows ________________

_________that an economy can use its
resources.
2. PPC ______________ ___________ is the
line that shows the maximum possible
output for that economy.
3. ____________________ means no missed
opportunities! Points along the curve illustrate
efficiency.
4. PPC shows ___________, or what is given
up; the trade off of producing more or less of
the other product (look at the coordinate
points). The more calzones that are
produced, the less pizzas. 8
What Information is Received from a PPC?

1. PPC shows alternative ways that an

economy can use its resources.
2. PPC frontier line is the line that
shows the maximum possible output
for that economy.
3. EFFICIENCY means no missed
opportunities! Points along the curve
illustrate efficiency.
4. PPC shows COST, or what is given up;
the trade off of producing more or less
of the other product (look at the
coordinate points). The more calzones
that are produced, the less pizzas.
9
Production Possibilities & Castaway….
http://www.youtube.com/watch?v=c2g2U_-9H9o&safety_mode=true&persist_safety_mode=1&s
afe=active

• Castaway ~ Tom Hanks had to survive after a plane crash

with only the resources salvaged from the plane wreckage
and the ones found on the island.
• With these limited resources, he must make a trade off
between fish production and coconut production.

p. 17 Figure 3.1
1. What is the maximum
quantity of fish Tom can
catch if he gathers 9, 15,
20 coconuts?

2. When Tom is producing

30 coconuts, how many
fish is he producing?

3. WHY? Is this efficient?

10
 What Information is Received from a PPC?
• PPC shows:
• underutilization: (inefficiency) NOT maximizing
resources found underneath the frontier line
• PPC shows:
• Growth: If more resources become available, or if
technology improves, an economy can increase its level of
output and grow. When this happens, the entire production
possibilities curve “shifts to the right.”
1. Where on the PPC, what point, is Tom being efficient with his resources?

2. Where is he MOST efficient?

3. Where on the graph (what point) is Tom being inefficient with his resources?
Give an example of inefficiency in the economy.

4. Where on the graph (what point) would you expect to see future growth?
11
The PPC Slopes. Why?

Opportunity Cost - Increasing

Opportunity Cost - Constant

12
 Why is a Production Possibility Curve Curved?
Krugman’s Figure 3.2 p. 19
• When Tom is producing 30 coconuts how many fish does he
produce?
• 0 Fish
• When he decides to produce fish, reallocating his resources
from coconut production to fish production, he produces 20
fish, but what is the trade off? In other words what does he
give up?
• 5 coconuts
»Is this a rational decision? In
other words does the benefit
exceed the cost? Why or why
not? 13
EF2b: The Decision Making Process
• D = define the problem (root cause or issue)
• L = list the alternatives (other choices)
• S = state the criteria (priorities & how to judge the
situation)
• E = evaluate the alternatives (what are the trade offs
& opportunity costs of each alternatives? What can
you live with?)
• M = make a rational decision (what is the marginal
benefit? What is the marginal cost?)
» What should outweigh what?

14
Law of Increasing Opportunity Costs
1. The amount of products given up to obtain
more if any given product is called
__________________ __________.
2. The more of a product produced the
______________ the opportunity cost.
3. WHY??

4. The slope of a production possibilities curve

becomes _____________ (going left to right)
demonstrating increasing _____________________
________. The curve appears bowed out or
concave.
15
Law of Increasing Opportunity Costs
1. The amount of products given up to obtain
more if any given product is called
opportunity cost.
2. The more of a product produced the greater
is its opportunity cost.
3. WHY?? Resources are scarce. More
resources must be diverted and allocated
away from the original product. (think guns
or butter)
4. The slope of a production possibilities curve
becomes steeper (going left to right)
demonstrating increasing opportunity cost.
The curve appears bowed out or concave.

16
Law of Increasing Opportunity Costs
WHY DOES THIS LAW EXIST?

• All economic resources are not equal or can be used for

the same task.
• Economic resources are not perfectly adaptable to
alternative uses.

Instead of pizza, let’s make bulldozers. (Pizza resources vs. Bulldozer resources)
What problems do you foresee? 1. Can we make bulldozers with dough, ovens &
cheese? (resources)

2. Can we make pizza with steel and wires?

(resources)

3. Are workers trained to make pizza may well

trained to build heavy equipment? (labor)

4. Is a pizza oven (capital) well suited to build a

bulldozer?
17
Economic Growth – it’s the rage buzzword
What is economic growth exactly?
• A sustained rise in aggregate output…ok…more…
• Expansion of the economy’s production possibilities
• Krugman’s p. 20 figure 3.3
1. What does point A represent
on the curve?

2. What does point E represent

on the curve?

18
Economic Growth – it’s the rage buzzword
What is economic growth exactly?
• A sustained rise in aggregate output…ok…more…
• Expansion of the economy’s production possibilities
• Krugman’s p. 20 figure 3.3
1. What does point A represent
on the curve?

20 fish, 25 coconuts, efficient

production of both products
(maximizing production with
resources given), frontier line

2. What does point E represent

on the curve?

Increase in production 25 fish, 30

coconuts, economic growth…but
how does it grow?
19
What Makes Production Grow???

• What could help Tom catch more fish?

• A net maybe, fishing pole, more bait…
• So an increase in resources…Land,
Labor, Capital, Entrepreneurship
will grow an economy
• Also an increase in technology
(technical means for production of
goods and services) will grow the
economy…an innovation or new
process if you will
20
 Activity: Graphing a PPC
Pizza & Bulldozers

Can an economy produce both of these?

21
Related Links:

1. https://quizizz.com/admin/presentation/5f8ae5a539
42a4001c817048?source=lesson_share
2. https://quizizz.com/admin/quiz/5de3e29764487300
1bc6aa75?source=quiz_share
3. https://quizlet.com/724173428/module-3-the-produ
ction-possibilities-curve-model-flash-cards/

22
 Homework:
1. How do economic trade-offs arise from the lack
of sufficient resources (scarcity) to meet society’s
wants and needs?
2. What does the production possibilities curve
model tell us about efficiency, opportunity cost,
and economic growth?
3. Integrate the concept with UAE’s (any two
leading products) economic conditions.
(search based)