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This module examines the Production Possibilities Curve (PPC) to illustrate society's trade-offs between the production of M-16 rifles and CD-ROM players. It explores concepts such as the Law of Increasing Relative Costs, opportunity cost, specialization of resources, and the implications of production choices on economic growth. By analyzing shifts in the PPC, we can assess how resources can be allocated to maximize outputs of both goods. This study emphasizes the balance between present consumption and future growth through capital goods investment.
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Module 3- The Production Possibilities Curve BY J. A. Sacco
Combination M-16 Rifles CD-ROM Players Society’s Trade-off BetweenM-16 Rifles and CD-ROM Players A 10.0 0 B 9.6 2 C 9.0 4 D 8.0 6 E 6.6 8 F 4.5 10 G 0 12
Point R is unobtainable. R S Point S is inefficient. Society’s Trade-off BetweenM-16 Rifles and CD-ROM Players 12 10 8 How is this curve different from the previous curve? M-16 Rifles (billions of units per year) 6 4 2 0 2 4 6 8 10 12 CD-ROM Players (billions of units per year)
A B C a b D c E d F e G f The Law ofIncreasing Relative Costs 12 Can we explain why the opportunity cost is not constant? 10 8 Opportunity cost in forgone M-16s M-16 Rifles (billions of units per year) 6 4 To obtain: 2 billion additional CD-ROM players 2 0 2 4 6 8 10 12 CD-ROM Players (billions of units per year)
The Choices Society Faces • Law of Increasing Relative Costs • As society attempts to produce more of a good, the opportunity cost of additional units generally increases. WHY?
The Choices Society Faces • Some resources better suited for certain products. • As you allocate more resources for that good, the production of that good will increase but at a greater cost for the good you are giving up because the resources are used in a less efficient manner. • The specializationof resources influence the shape of the production possibilities curve. • The more specialized the factor of production, the greater the opportunity cost and the curve in the PPC.
Economic Growth and the Production Possibilities Curve • Economic Growth: How can you increase the production of both M-16s and CD-Roms? • Occurs over a period of time. • Is illustrated by an outward shift of the production possibilities curve.
Economic Growth Allowsfor More of Everything M-16 Rifles (billions of units per year) CD-ROM Players (billions of units per year)
The Trade-Off Betweenthe Present and the Future • The PPC can be used to illustrate the trade-off between present and future consumption. • Consumption Goods- The use of goods and services for personal satisfaction. • Capital Goods- Goods used to produce other goods.
A B 4 5 Capital Goods and Growth • Consumer goods • Goods produced for personal satisfaction • Capital goods • Goods use to produce other goods Capital Goods per Year Consumption Goods per Year ($ trillions)
Future growth as a result of A on the left-hand diagram A B 4 5 Capital Goods and Growth Capital Goods per Year Recreation per year Today Consumption Goods per Year ($ trillions) Food per Year
Future growth as a result of C on the left-hand diagram C B 3 5 Capital Goods and Growth Capital Goods per Year Recreation per year A Today 4 Consumption Goods per Year ($ trillions) Food per Year
Capital Goods and Growth • Observations • Forgo consumption goods to produce capital goods • Increase in capital goods stimulates economic growth • In the future the economic system can produce more consumer goods • An increase in capital goods will lead to a higher rate of economic growth in the future
