3 Replies Latest reply: Aug 16, 2013 5:25 PM by Jane Brown RSS

What is a production possibility curve?

lore12795 New User
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What is a production possibility curve?

  • Re: what is a production possibility curve?
    Jane Brown Master
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    Here is an 8 minute video by PlainSense Economics that introduces the production possibility curve, then shows how we can consider choices on allocating a scarce resource (in this case study time) and finally introduces us to the concept of opportunity cost.

     

     

    Let me send this question to my favorite economist and see if she can give you a more personal response.  :-)

  • Re: What is a production possibility curve?
    Khorn Novice
    Currently Being Moderated

    Lorena:

     

    Sorry for the delay, but we had a mandatory faculty meeting today.

     

    Jane was very resourceful in sending you a video to watch.  I began to watch it and quickly realized that the introductory remarks were not entirely correct, and might be confusing.   So, ignore that video and let's see if we can outline a few steps for you on basics.

     

    • A production possibilities curve is a graphic depictation  of a trade-off
    • You have some assumptions to accept: (1) this is hypothetical, (2) you have limited resources, (3) you can only produce two goods, and (4) you have choice.
    • Your graph will look like 2 models. One, the model that the video displayed and two, a triangle model.  The model with the concave line indicates that you have the Law of Increasing costs (which means you have to give up more of one resource to get another.)  Think of the PPC as producing busses and cars.  If you put busses on the vertical axis and cars on the horizontal axis, you can readily see it takes more "stuff" to make a bus than a car. So you have to give up more cars to get a bus.   Hence, remember, we have limited resources.
    • The second model (the triangle with a straight hypotenuse) indicates that you have a one to one ratio for trade-off of resources.  The video that Jane sent indicated you had two subjects you were taking this semester.  Let's say- English and Economics.  You have a limited amount of time to study (let's say 10 hours.) Obviously, you can study all ten for econ and perhaps flunk English or vice versa.  Or, you can study 5 and 5 , 8 and 2, etc.  But each hour is an equal trade-off.
    • Most economists specifically talk about the ppc with the concave line so I would concentrate on that model.
    • The next thing to realize is that you can not produce your products outside your concave curve.  Those are unattainable (now you also need to mention that with increased R & D  and technology your curve can move outward and then you can increase your production possibilities. *Note:  If you are teaching macroeconomics the extension of the ppc is equivalent to the extension of LRAS in the Aggregate Supply explanation.  That, of course if a result of increased GDP and moving the target for full-employment.  If you are teaching micro, you don't have to worry about teaching that concept.
    • It should also be noted that if you are producing inside your curve, you are inefficient.  This is where economies find unemployment and wasting of potential resources.

     

    Now, that is the basic info about ppc's, but I am going to attach a link to some free videos on business and economics that you will find interesting.  Go to the macroeconomics portal and you will see the video on scarcity, opportunity cost and then production possibilities.  it is a simple explanation and very accurate.  Just remember the assumptions for the ppc and you will have it down pat.

    Good luck.

     

     

    http://education-portal.com/academy/subject/business.html

     


    • Re: What is a production possibility curve?
      Jane Brown Master
      Currently Being Moderated

      Thank you, Karen, I was out of my element here; however, I think I actually understand your explanation.

       

      I hope this helps Lorena too.  If you need more clarity, don't hesitate to write back here.  Karen is an Adjunct Professor of Economics in Texas and you are now connected to our expert.  :-)

       

      Jane Brown, Thinkfinity Community Manager

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