Economic Challenges Facing Countries & Business
PPC:
Production Possibilities Curve
Economic System: A set of rules by which a nationdecides how to distribute its resourcesto satisfy its people’s needs and wants.
3 Basic Questions for Goods & Services: 1. Which goods and services will be produced? 2. How will these goods and services be
produced? 3. How will these goods and services be
distributed?
Factors of Production
Economic Resources: Resources that could be used
to produce or create goods or services. When economic resources
are actually used to produce goods or services, they become Factors of Production.
4 Factors of Production: 1. Natural Resources: 2. Human Resources 3. Capital Resources 4. Entrepreneurial
Resources
Natural Resources
1.) Natural Resources: Things that come from the air, water, or earth. 2 Types of Natural Resources: A. Nonrenewable Resources: Cannot be replaced or renewed – coal, oil, and
other minerals. B. Renewable Resources: Can be replenished – water and plants
Human Resources 2.) Human Resources: People who contribute physical and
mental energy to the production process.
Human Resources are also called Labor or Employees.
Experts tell us that Human Resources are the most important resource a business can have. If treated badly, they will leave the business and then the business cannot function.
Treating your employees fairly is critical to the success of your business.
Capital Resources 3.) Capital Resources: All the other items other than natural
resources that are used to produce goods and services .
This includes buildings, machines, equipment, and tools.
Capital Resources do not directly satisfy our wants but are still useful and necessary for production to occur.
Money is not technically considered a CapitalResource since it does not directly produce goods and services.
Entrepreneurial Resources 4.)Entrepreneurship: The initiative to
combine natural, human, and capital resources to produce goods or services.
Entrepreneurs are the people who recognize a new want or need and find ways to combine resources to fulfill that want or need
What does scarcity force countries to do? Scarcity causes countries to answer the 3 basic
economic questions: 1. Which goods & services will be produced? 2. How will goods and services be produced?
3. How will goods and services be distributed? Since resources are limited, a country cannot make
every good in the quantity its people would like as inexpensively as they may desire.
Population and Production: Population: The number of people living in an area, usually
a country. The more people a nation has, the tougher the
production decisions become.
Effects of Population Growth : 1. As population increases, the number of needs
and wants that must be fulfilled also increases. 2. As population increases, the available labor
supply increases.
Making Decisions About Production
The resources used for one purpose cannot also be used for something else
Example: Land used to farm cannot also be used to
build a factory.
To produce one thing we must give up another. What is this called?
This foregone choice is called the Opportunity Cost.
Production Possibility Curve
Candy Bars
This graph showsthe number of candy bars and gumballs a candy company might produce.
2520151050
1 2 3 4 5
• A Production Possibility Curve/Graph is used to measure the trade-off a country or business makes when deciding to produce one product over another.
• A production possibility curve is a graph which shows the different production combinations that are possible for two goods or services.
Production Possibilities Frontier
Model used to illustrate opportunity costs
It is the line that shows maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed
Any spot on that line represents a point at which all the resources are being used to produce a max combination of two products
Represents an economy working at its most efficient level of production
Any point inside the line indicates an underutilization of resources
Guns v. Butter
A – 100 Butter, 30 Guns
B – 50 Butter, 120 Guns
C – Overuse of resources (temporary)
D – Resources not fully employed
This graph shows the number of guns and butter a country can produce:
Production Possibility Curve
25 20 15 10 5 0 1 2 3 4 5
Candy Bars The x-axis is the horizontal axis. It represents one good, candy bars. The y-axis is the vertical axis. It represents another good, gumballs.
Let’s look a little closer at how this works.
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Production Possibility Curve
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Candy Bars Look at the red dots.What is the maximum number of Gumballs which can be produced? 25
What is the maximum number of candy bars which can be produced? 5
Can we produce the maximum number of both goods? NO
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Production Possibility Curve
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Why can’t we producethe maximum of both goods? If the maximum amount of one
good is produced, then none of the other good can be produced.Look at the green dot
If 5 candy bars are made, then 0 gumballs can be made. If 25 gumballs are made, then 0 candy bars can be made.
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Production Possibility Curve
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Candy Bars WHAT CAN WE MAKE?
We can make any combination of goods which lies along the blue sloping line on the graph.
We look for common points along the line for both products.
Let’s look at some possibilities.
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Production Possibility Curve
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Candy Bars IF WE PRODUCE 15 GUMBALLS,
HOW MANY CANDY BARS CAN WE MAKE? ______ 2
We go up the y-axis to 15 gumballs and across to the line. The red dot shows that if we make 15 gumballs then we only have the resources left to make 2 candy bars.
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Production Possibility Curve
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Candy Bars What if we think 2 candy bars is not enough?
WHAT IF WE DECIDE TO PRODUCE 4 CANDY BARS INSTEAD OF 2?
Now, how many gumballs can we make? 5
We go across the x-axis to 4 candy bars and up to the line. The red dot shows that we can make only 5 gumballs
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Production Possibility Curve
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Candy Bars How many gumballs do we lose if we make 4 candy
bars instead of 2? 10Look at the red dots
AT, 2 candy bars, we make 15 gumballsAT, 4 candy bars, we make 5 gumballs
15-510
WE lose 10 gumballs: law of increasing costs (opportunity cost increases)
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Production Possibility Curve
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How do we decide which is better, 2 or 4 candy bars?
How do we decide which is better, 2 or 4 candy bars?
TRICK QUESTION!The answer is……
IT DEPENDSWe can’t, not just yet.We would need more information.
It’s the same way for companies and countries.
They will look at many factors such as:
• the cost of the ingredients for each product,• how many of each item they can sell,• how much they can charge for each product,• how many workers or machines are needed
for each.• Business can be very complex.
Using the Production Possibilities Frontier
The production possibilities frontier (PPF) is a useful tool for understanding economic choices made by societies. It is also a useful model for understanding economic growth.
The PPF is a graph that shows how a country might allocate scarce resources in its production of goods and services. For simplicity, the model shows the production of two types of goods and services—defense goods (military goods and services produced for national defense; for example, tanks, satellites, and warplanes)and civilian goods (goods and services produced for consumption for nonmilitary purposes; for example, cars, education, and medical care)—we might draw a graph that looks like Figure 1.
Frontier:
Represents the max quantity of defense goods and civilian goods the economy can produce with its currently available resources.
Economic resources: • Land (natural resources)• Labor (workers)• Capital (goods used to produce other goods and services)
For Example:
• This society might choose to allocate resources in a combination reflected by point “B”
• Which shows a large quantity of defense goods produced (11 units)
• And a much smaller quantity of civilian goods produced (5units)
• This society would enjoy a greater sense of security but have fewer goods and services available for consumption by its civilian population
Or, The society might choose to
produce the combination reflected by point “D”
Which shows a larger quantity of civilian goods (11units)
And a much smaller quantity of defense goods (5 units)
Now, the society has chosen to forgo some national security in exchange for a higher consumption of civilian goods.
In both cases, when society is producing on the “frontier”!
It indicates that the society is using all its available resources and producing at an efficient level
Alternatively, the society might choose point “A”• This indicates a much smaller production of both defense goods
and civilian goods (5 units each)• The choice of a point inside the PPF shows the resources in the
economy are underutilized• Society is using fewer resources than optimal
• This might occur during an economic recession when some factories sit idle
• And/or some workers are unemployed
PPF is useful to visualize the economic concepts of - Scarcity and Opportunity cost
• Imagine a society that chooses point “D” as its current allocation of resources between defense goods and civilian goods
• If this society decides more security is needed (greater spending on defense goods by moving to point B)
• Then, this choice would require giving up 6 units of civilian goods.
• Why? • Because of Scarcity • The resources used to produce
defense goods are not available for the production of civilian goods
• The civilian goods given up as a result of this choice constitute an opportunity cost –
• The value of the next best alternative when a decision is made; it’s what is given up
Economic Growth means more of both goods:
• In the model that we’ve been looking at, we learned that the frontier represents maximum production with current resources.
• In this case, when we are looking at an economy’s production of goods and services – production point “E” is not possible with current resources
The frontier itself can shift outward (to the right and up)
This shift represents economic growth that creates• Rising opportunities,• Living standards• And incomes for people
The shift can be a result from increases in inputs and outputs
The increase in inputs is simply an increase in the # of available resources
More land (natural resources)
Labor Or, capital Outputs - Sustainable
long-run growth is the result of better use of existing land, labor and capital through technological progress and innovation
The outward shift of the frontier made possible by economic growth makes production at point “E” possible
During recessions, the economy may operate with an above-average number of unemployed people.
That is, when the economy is operating below its productive capacity; this is indicated by a point inside the PPF, such as point “A”
Monetary policies leading to lower interest rates or fiscal policies—such as tax cuts or increases in government spending—designed to push the economy back toward the PPF might be used in recessions to move the economy back toward its potential, such as point “B.”
This move toward the economy’s potential is often referred to as economic expansion.
The Difference between Economic Expansion and Long-run Economic Growth:
Economic expansion moves production capacity toward the previously established PPF
Economic growth shifts the PPF outward
This makes the production at point “C” possible
Lower interest rates, tax cuts, and increases in government spending can be used to support economic expansion
But, Economic Growth that shifts the PPF is a result of increases in resources and productivity and is supported by economic institutions that promote growth