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Production Possibilities, Opportunity Cost and

Economic Growth

Economics for Today by Irvin Tucker, 6th edition©2009 South-Western College Publishing

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What will I learn in this chapter?

Having learned that scarcity forces choices, here you will study the choices people make in more detail

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What will I learn to solve in this chapter?

• Why do so few rock stars and movie stars go to college?

• Why would you spend an extra hour reading this text rather than going to a movie?

• Why are investment and economic growth important?

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What are the three fundamental

economic questions?

What to produce?How to produce?

For whom to produce?

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What are two key concepts in this

chapter?Opportunity costsMarginal analysis

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What isopportunity cost?The best alternative sacrificed for a chosen alternative

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What opportunity cost am I experiencing now?

The most money that you could be making if you were somewhere else instead of studying these slides

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Can opportunity cost be something other

than money? Yes, that most desired activity that you are presently giving up is considered an opportunity cost

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Scarcity

Choice

OpportunityCost

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What ismarginal analysis?An examination of the effects of additions to or subtractions from a current situation

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What is an example of marginal analysis?

When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides

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What is a production possibilities curve?

A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology

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What is technology?

The body of knowledge and skills applied to how goods are produced

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What assumptions can I make about the

productions possibilities model?

Fixed resourcesFully employed resourcesTechnology unchanged

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What conclusion can I make about scarcity?Scarcity limits an economy to points on or below its production possibilities curve

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What are efficient points?

Because all the points along the curve are maximum output levels with given resources and technology, they are called efficient points

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What happens when we move between two

efficient points?A movement between any two efficient points means that more of one product is produced only by producing less of the other

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AO

utp

ut

of

milit

ary

g

ood

s

Output of consumer goods

Production Possibilities Curve

B

C

D

UInefficient point

ZUnattainable pointAll points on curve are efficient

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What is the law of increasing

opportunity costs?

The principle that the opportunity cost increases as production of one output expands

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AO

utp

ut

of

milit

ary

g

ood

s

Output of consumer goods

The Law of Increasing Opportunity Cost

B

C

D

All points on curve are efficient

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What iseconomic growth?

The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve

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What makes possible economic growth?

Research and development of new technologies

Increase production in excess of worn out capital

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Technologicaladvance

Economicgrowth

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Com

pu

ters

Pizzas

Technological Advance

A

B

C

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What happens when a country does not invest

in new technology?Everything else being equal,

the country will not grow

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What is investment?The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services

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What is the opportunity cost of

investment?The consumer goods that could have been purchased with the money spent for plants and other capital

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What does an increase in investments make

possible in the future?Economic growth and more goods and services

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What conclusion can I make about investments?

A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out

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END