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Production Possibilities
Principles Of Macroeconomics (Gt-Ss1) (ECO 201)
Colorado Mountain College
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In business, the Production Possibility Curve (PPC ) is used to evaluate the performance of the manufacturing system when two commodities are produced together. The management uses this diagram to plan the perfect proportion of goods to be produced to reduce waste and costs while maximizing profits.
PPC Curve: h
A curve that outlines all possible combinations of total output that could be produced assuming:
**- The utilization of a fixed amount of productive resources
- Full and efficient use of those resources
- A specific state of technical knowledge**
The slope of the curve indicates the rate at which one product can be traded off to produce
more of the other
Example:
If a company produces 20,000 watermelons
and 1,20,000 pineapples. On the diagram, its
point B. If the production of oranges needs
to be more, then the production of the apple
should be lesser. On the graph, point C
indicates that if it production of watermelons
has to be 45,000, then the company can
deliver only 85,000 pineapples. With this
trade-off, the curve shows the idea of
opportunity cost.
The slope of the curve indicates the rate at which one product can be traded off to produce
more of the other There are three places that we can be on the graph (not the curve but the
entire graph)
A. Efficiency – these are points that lie on the curve
B. Inefficiency – these are points that lie inside the curve
C. I mpossibility – these are points that lie beyond the curve
Shifting the curve means pushing it outward and expanding the economy, some curve shift factors are: Change in the amount of productive resources in the economy and Changes in technology and productivity. This can happen when companies:
An increase in the economy’s resource base would expand our ability to produce goods and services: if we have more resources we can produce more goods to consume.
Advancements in technology: think about the world 100 years ago and how much more free time people have now and how much higher the standard of living is today.
An improvement in the rules under which the economy can increase output: The government can set price controls on goods restricting the market from determining prices which could cause a welfare loss for the economy, or the government could restrict trade from other countries not allowing for the law comparative advantage to occur.
By working harder and giving up current leisure we could increase our production of goods and services: We can shift away from other goods that we no longer wish to consume to attempt to produce goods that we now want (for example we can shift away from making horse and buggies as people no longer desire them in order to make cars which allow for faster transportation, increasing the amount of time we can spend in other endeavors
Increasing, Decreasing, and Constant Curves: The Production Possibility Curve shows the tradeoff between spending projects or production of one good to another.
Increasing Constant Decreasing
Opportunity Cost Opportunity Cost Opportunity Cost
By describing this trade-off, the curve demonstrates the concept of opportunity cost. Making more of one good will cost society the opportunity of making more of the other good. The production possibility curve depicts the cost of the company's choice between two different goods. An economy that operates at the border has the highest standard of living it can achieve, as it produces as much as it can by using the same resources.
1. Suppose an investigator has 50 years of data on rates of industrial production and annual accumulations of CO2, and discovers a positive relationship between the two variables. This is an example of what type of investigation? a. theoretical investigation b. Empirical investigation c. Historical investigation d. Both A and B. e. A, B, and C.
2. What does the Production Possibilities Frontier represent? A a. catalog of all possible production options, represented as percentages. b. The tradeoffs between production and consumption options. c. The tradeoffs between possible production levels for two goods. d. The amount that a society could produce if it devoted all its resources to producing one good. e. The possible gains from international trade in two or more goods.
3. Which of the following factors could expand a society’s production possibilities frontier? a. Increased butter production. b. Shifting from one product to another. c. Producing air pollution. d. Depleting resources now instead of later. e. Technological innovations.
4. The nation of Anyplace produces two goods, chairs and tables. Anyplace can produce the chairs and tables using either sustainable methods or resource-depleting methods. If Anyplace chooses resource-depleting methods, which of the following statements is true? a. Eventually the PPF of Anyplace will shift outward (away from the origin). b. Eventually the PPF of Anyplace will shift inward (toward the origin). c. Eventually the PPF of Anyplace will pivot, causing a change in the slope of the curve. d. Eventually Anyplace will have to choose between producing only chairs or producing only tables. e. None of the above
5. Which of the following is an activity in the business sphere? a. The government increases funding for public schools. b. Tina sells home-made jam at the local market. c. John helps a neighbor with yard work. d. Martha volunteers to organize a community clean up event. e. The local police department leads a training session on ensuring public safety.
6. Regulating the activities of financial institutions occurs in the: a. public purpose sphere b. the informal sphere
c. the banking sphere d. the core sphere e. the business sphere
7. In the United States, the monetary value of the annual production of goods and services was largest in: a. the core sphere b. the informal sphere c. the public purpose sphere d. the business sphere e. the free rider sphere
8. Which of the following is not a characteristic of the informal sphere? a. It is often dependent on family and community connections b. It operates under government regulation and oversight c. It is comprised of small scale market enterprises d. It may include illegal activities and services provided “off the books” e. The relative size of informal sphere tends to be larger in less developed countries
9. Which of the following is an example of a core sphere activity? a. James plays a game of catch with his nephew. b. Martha works at a bank. c. A local fire department responds to local emergencies. d. A national government purchases weapons. e. A publicly funded state college provides education.
10. The activities of the U. Environmental Protection Agency would be characterized as part of: a. The core sphere b. The free rider sphere c. The public purpose sphere d. The business sphere e. The informal sphere
Answer: 1 - b 2 - c 3 - e 4 - b 5 - b 6 - a 7 - d 8 - b 9 - a 10 - c h
Production Possibilities
Course: Principles Of Macroeconomics (Gt-Ss1) (ECO 201)
University: Colorado Mountain College
