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1.3 PRODUCTION POSSIBILITIES CURVE

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ECONOMICSMR. HOOD27 JANUARY 2014

1.3 PRODUCTION POSSIBILITIES CURVE

ECONOMICSMR. HOOD`S NOTES27 JANUARY 2014

SECTION FOCUSDECISIONS ABOUT WHICH GOODS AND SERVICES TO PRODUCE EFFECT EACH OF US EVERY DAY. PRODUCTION POSSIBILITIES GRAPHS CAN HELP US TO EXAMINE THE OPPORTUNITY COST OF THESE DECISIONS.

INTRODUCTION

IN 1941 USA ENTERED WORLD

WAR II

U.S. FACED A DECISION

CREATE WEAPONS +

EQUIPMENT OR FACE DEFEAT

SO GOVERNMENT SWITCHED ALL

OUTPUT TO MILITARY PRODUCTS

EVERYTHING ELSE WAS PUT ON

HOLD

GUNS OR BUTTER

IN EASY WORDS, NATIONS MUST

ALWAYS CHOOSE WHAT TO PRODUCE

WHETHER AT WAR OR NOT

OBJECTIVE 1INTERPRET A PRODUCTION

POSSIBILITIES CURVE

ECONOMISTS USE PRODUCTION

POSSIBILITIES GRAPHS

TO ANALYZE CHOICES

AND TRADE-OFFS

HELPS US SEE HOW ONE

THING RELATES TO ANOTHER

SHOWS ALTERNATIVE WAYS TO USE

RESOURCES

OBJECTIVE 2DEMONSTRATE HOW

PRODUCTION POSSIBILITIES CURVES SHOW EFFICIENCY,

GROWTH AND COST

GRAPHS SHOW HOW EFFICIENT AN

ECONOMY IS

WHETHER IT HAS

GROWN OR SHRUNK

AND THE OPPORTUNITY COST

PRODUCTION POSSIBILITIES CURVE

0%

1 - EFFICIENCY

IS PRODUCTION AT ITS BEST?

ANY POINT UNDER THE LINE IS

UNDERUTILIZATION

0%

2 - GROWTHFUTURE PRODUCTION

POSSIBILITIES FRONTIER

MORE WORKERS OR BETTER TECHNOLOGY

0%

LAW OF INCREASING COSTS

MORE MONEY NEEDED TO

MAKE GUNS OR BUTTER

0%

OBJECTIVE 3UNDERSTAND THAT A

COUNTRY`S PRODUCTION POSSIBILTIES DEPEND ON

ITS AVAILABLE RESOURCES AND TECHNOLOGY

GOVERNMENTS MUST DECIDE WHAT TO

PRODUCE

DEPENDING ON LAND AND NATURAL

RESOURCES

PHYSICAL AND HUMAN

CAPITAL

TECHNOLOGY

THIS INFORMATION EFFECTS A COUNTRIES

PRODUCTION