Efficiency and Tradeoffs in Production

The Production Possibilities Curve

Graph the following:Televisions Cars

0 168 14

13 1016 618 219 0

Televisions

Cars

0

16

19

Production Possibilities Curve

PPC

Production Possibilities Curve

• A graphical representation of the trade-offs encountered when switching resources from producing one good to another in the presence of fixed resources

• The possible mixes of production at maximum efficiency

Televisions

Cars

0

16

19

Consider the following points:

PPC

A

C

D

B

A & B: Possible and Efficient

C: Possible, but InefficientD: Not Possible with given resources

Can the PPC Shift?

• What happens when there is an innovation that makes televisions faster (more efficient) to produce?

Televisions

Cars

0

16

19

Production Possibilities Curve

PPC1 PPC2

Sector-Specific Shift

Can the PPC Shift?

• What happens when labor productivity improves throughout the economy?

Televisions

Cars

0

16

19

Production Possibilities Curve

PPC1 PPC2

Economy-Wide Shift

Production Possibilities Curve

• Is there a relationship between the shape of the curve and the opportunity costs encountered in shifting production from ne good to another?

Figure 3.2 Increasing Opportunity CostRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Increasing Opportunity Costs

• Why?

–Most efficient resources are first ones that are shifted over