AP Microeconomics

1.3 The Production Possibilities Curve Model

Learning Objectives
• Summarize the crucial role of models as simplified
representation of economic realities.
• I can explain how the production possibilities curve graph
illustrates necessary trade-offs.
• Describe what the production possibilities curve model tells us
about scarcity, efficiency, and opportunity cost.
• Explain how changes in technology and the availability of
resources influence economics growth and the production
possibilities curve.
 Introduction
• The production possibilities curve: a model that helps economists think
about the trade-offs (choices) necessary in every economy.

It shows the trade-offs the society faces

• The production possibilities curve helps us understand three important

aspects of the real economy:

• 1- Efficiency
• 2- Opportunity cost
• 3- Economic growth
The use of models in economics

• Testing an airplane design in a wind tunnel is

cheaper and safer than building a full-scale
version and hoping it will fly.

• Pilots train with flight simulators and cockpit

models.

• Models play a crucial role in almost all

scientific research- Economics included.

• Economists like to create models with graphs

and equations.
The use of models in economics
• A model: is any simplified version of reality used to better
understand a real-life situation.

• For example:
-Economists interested in the role of money have studied the system of exchange that
developed in World War II prison camps in which cigarettes became a universally accepted
form of payment.

-When changes in tax law are proposed, government officials use tax models- large
mathematical computer programs-to assess how the proposed changes would affect
different groups of people.
The use of models in economics
• Models are important because their simplicity allows economists to focus on
the influence of only one change at a time. They allow us to hold everything
else constant and study how one change affects the overall economic
outcome.

• Holding Everything Else Constant (Ceteris Paribus):

This is a Latin phrase meaning "all other things being equal." When economists use this
assumption, they are isolating the effect of one variable by assuming that all other relevant
factors remain unchanged. This makes it easier to see the direct impact of the variable being
studied.

For example, if you want to study how a change in the price of a good affects its demand,
you would hold other factors like consumer income and the prices of related goods constant.
The use of models in economics
• When building economic models, it is important to make the:
Other things equal assumption/Ceteris paribus: which means that
all other relevant factors remain unchanged.

Without this assumption, it would be very difficult to isolate the effect of the price change
because other factors could also be changing at the same time, making it hard to determine
what is causing what.
The use of models in economics
• The most effective form of economic modelling is the
construction of thought experiments.
• Thought experiments: simplified, hypothetical versions of real-
life situations, it is an imagined scenario to understand the
consequences of a theory or a principle.

• The graphical model that will be studied is the production

possibilities curve.
 Trade-offs: The Production
Possibilities Curve
In 1709, Alexander Selkrik was a crew member on a ship that he correctly feared was not
seaworthy. The ship met its fate at the bottom of the sea. Alex was alone in a deserted
island near Chile, and he had limited resources: the natural resources of the island, few
items he brought from the ship and his time and effort.
• The figure shows a hypothetical PPC for Alex who must make a trade-off between fish production and coconut production.
• The curve shows the maximum quantity of fish Alexis can catch during a week given the quantity of coconuts she gathers,
and vice versa.

If a production point lies inside or on

the curve like point like point C at A simplified economy that produces only two
which Alex catches 20 fish and gathers goods.
9 coconut- it is feasible.

Production inside/below the curve

indicates that resources are
underutilized/inefficient, which can
mean that land or capital lies idle or
that workers are unemployed

A Production point outside the curve-

such as point D which would have Alex
catching 40 fish and gathering 30
coconuts isn’t feasible because the
economy resources and technology
are not sufficient to reach that point.
 Trade-offs: The Production Possibilities
Curve
The PPC intersects the horizontal axis
at 40 fish. This means that if Alex
devoted all her resources on catching A simplified economy that produces only two
fish, she would catch 40 fish per week goods.
but would have no resources left over
to gather coconuts.

The PPC intersects the vertical axis at

30 coconuts. This means that if Alexis
devoted all her resources to gathering
coconuts, she could gather 30
coconuts per week but would have no
resources left over to catch fish.

----If Alex wants 30 coconuts the

trade-off is that she can’t have any
fish.
Trade-offs: The Production
Possibilities Curve
A simplified economy that produces only two
goods.
If Alex decides to catch 20 fish, she
would be able to gather at most 15
coconuts (point A)

If Alex decides to catch 28 fish, she

would be able to gather at most 9
coconuts (point B)
Review
Efficiency
• An economy is efficient if there are no missed opportunities. This
means that there is no way to make someone better off without
making someone else worse off.

Explanation:
An efficient economy utilizes all its resources optimally, leaving no opportunities
to improve someone's situation without causing a detriment to someone else.

In an efficient economy, all resources are already being used in the best
possible way. Any attempt to improve one person's situation (make them better
off) would require taking resources away from someone else, which would
make that person worse off.
Efficiency
Example:
Imagine you are in a classroom that is too small, some students have to sit on the floor or stand.
Meanwhile, a larger classroom nearby is empty.
Economists would say that this situation is inefficient because the empty larger classroom
represents a missed opportunity to use resources better, and there is a way to make some
people better off without making anyone worse off.
If the class moved to the larger classroom, no one would have to sit on the floor or stand.
Everyone would be better off, and no one would be worse off.

Inefficiency Example: The small classroom with students on the floor while a larger one is
empty represents a missed opportunity to use resources better.
Efficient Example: All classrooms are already being used optimally. There is no empty larger
classroom available. Each classroom is filled in a way that maximizes the space and resources
efficiently.
In an efficient economy, improving your classmates' situation (moving them to the larger
classroom) means making the other class worse off (moving them to the smaller classroom).
 Efficiency Returning to Alex example, as long as Alex produces a
Point A: the 15 coconuts she gathers are the combination of coconuts and fish that is on the production
maximum quantity she can get given that she has possibilities curve, her production is efficient.
chosen to catch 20 fish. No resources are being wasted, so there is no way to make
more of one good without making less of the other.
Point B: the 9 coconuts she gathers are the maximum
she can get given her choice to catch 28 fish.

Productive efficiency: The economy is producing

efficiently if it is producing at any point on its PPC and
it is part of what’s required for the economy as a whole
to be efficient.

Point C: Producing inefficiently, missing the

opportunity to produce more of either or both goods
with no trade offs.
-By moving from point C to point A, the economy could
produce more coconuts without giving up any fish.
-By moving from point C to point B, the economy could
produce more fish with no loss of coconuts.
-Any point between point A and point B, the economy
could make both more coconuts and more fish.
Efficiency
• Another example of inefficiency in production occurs when
people in an economy are involuntarily unemployed: they want
to work but are unable to find jobs, when this happens the
economy is not productively efficient because it could produce
more output if those people were employed.

• The PPC shows all the combinations of two goods that could be
produced if all resources were fully employed.
Efficiency
Changes in unemployment move the economy closer to, or
further away from the PPC.

Greater unemployment is represented by points farther below the

PPC.

Lower unemployment is represented by points closer to the PPC-

as unemployment decreases, the economy moves closer to
reaching its possibilities.
Efficiency
• The efficiency of the economy as a whole requires both:

• Allocative Efficiency: If an economy produces at the point along

its PPC that is preferred by consumers.
• Whoever wants it, gets it.(quantity)

• Productive efficiency: The economy is producing efficiently if it is

producing at any point on its PPC and it is part of what’s required
for the economy as a whole to be efficient.
• Lowest cost possible.
Efficiency
• Allocative Efficiency: If an economy produces at the point along its
PPC that is preferred by consumers.

Notice that points A and B represent situations in which the economy is

productively efficient because in each case it can't produce more of one
good without producing less of the other.
But these two situations may not be equally desirable.

Suppose Alex prefers point B to point A (28 fish and 9 coconuts), then
point A represent inefficient allocation of resources because it is possible
to make alex better off without making anyone else worse of.
 ALWAYS USE
Opportunity Cost Per-unit Opportunity
opportunity cost=opportunity lost
Questions: cost= units of (the financial and non-
goods given financial cost of a
If Alex decided to go from point A to point B what is the opportunity
choice not taken.
cost? up/units of
15-9=6 coconuts goods gained
She will produce 8 more fish but fewer 6 coconuts.
8 extra fish has the opportunity cost of 6 coconuts
1 fish has an opportunity cost of ¾ of a coconut.
 Opportunity Cost
-Is the opportunity cost of an extra fish in terms of coconuts
always the same?
Yes

-If Alex increases her catches from 28 to 40 fish what is the

opportunity cost?
9-0=9 coconuts
She will produce 12 more fish but fewer 9 coconuts.
12 extra fish has the opportunity cost of 9 coconuts.
1 fish has the opportunity cost of ¾ of a coconut.

The oc per additional fish is ¾.

Opportunity Cost
• Whenever we assume that the opportunity cost of an additional
unit of a good doesn’t change regardless of the output mix, the
production possibilities curve is a straight line and constant
slope implying constant opportunity cost.

The slope of the straight line PPC is equal to opportunity cost.

The slope of the staright line equation:
m = (y2 – y1)/(x2 – x1)

A constant slope of the PPC means that the opportunity cost of

producing one good in terms of the other remains constant along the
curve.
Opportunity Cost
• The more fish she catches the
more coconut she has to give up
and vice versa.

• What is the opportunity cost of

increasing the production from
zero fish to producing 20 fish?
• 30-25=5 coconuts

• What is the opportunity cost of

increasing the fish production
from 20 to 40?
• 25-0=25 coconuts
*When opportunity costs are increasing rather than constant, the
PPC is a concave-shaped (bowed out) curve rather than straight
line.
The OC will increase *If the opportunity costs are decreasing, the PPC would instead
as you move down. be convex-shaped (bowed in).
 Opportunity Cost
• As more of a good is produced, its opportunity
cost typically rises because resources
specialized for the production of that good are
used up and resources specialized for the
production of the other good must be used Tip:
instead. (different specialization) (corn and
wheat they have different growing conditions). The use of specialized resources
makes the production possibilities
curve concave to the origin,
• In some cases, there is no specialization of meaning that it is bowed out.
resources, meaning that all resources are
equally suitable for the production of each When there is no specialization of
good, the opportunity cost for each unit resources for the production of the
remains the same as more of a good is made. goods, there is no increase in the
PPC is straight and downward sloping line. opportunity cost of making more of
either good and no change in the
For example: two leather belts could be made
with labour, leather, and other resources to slope of the PPC- it is a straight
make one leather hat, the opportunity cost of line.
each leather hat is two belts.
 Constant vs Increasing Opportunity
cost
The ones who are expert in producing gummy
bears

-Straight/ linear line

-2 products are relevant
-No specialization(resources are adaptable to -2 products are irrelevant (there is
alternative uses) specialization)
 Per-unit opportunity
cost= units of goods
given up/units of goods
gained 0.5
Constant Opportunity Cost

A 0 2 4 6 8 10 12 14
B 10 9 8 7 6 5 4 3

What is the opportunity cost of moving the A production from 4

to 6 ?
8-7=1 B

What is the opportunity cost of moving the A production from 8

to 10?
6-5=1 B
 Per-unit opportunity cost=
units of goods given
Increasing Opportunity Cost up/units of goods gained

A to b -> 1
B to c -> 2
D to E -> 10
Goods Purchased A B C D E

Chips 0 10 12 14 16

Pretzels 50 40 30 20 0

The PER-UNIT opportunity cost is going up shows the law

of increasing opportunity cost
Checking your answer
Calculate the per unit opportunity cost between each combination
to see if it is increasing or constant.
Economic Growth
• Economic growth: is an increase in the maximum possible
output of an economy.
• The economic growth means an expansion of the economy’s
production possibilities: the economy can produce more of
everything.
Economic Growth
• If Alex production is initially at
point A (20 fish and 25
coconuts), with economic
growth she could move to
point E (25 fish and 30
coconuts).
• Point E lies outside the original
curve, so in the PPC model,
growth is shown as an outward
shift of the curve.
• Unless the PPC shifts outward,
the points beyond the PPC are
unattainable.
Economic Growth
• What can cause the PPC to shift outward/what are the general
sources of economic growth?

1- Increase in the availability of resources (factors of

production) used to produce goods and services. (land,
labour, capital, and entrepreneurship).

Example: Fish become more abundant in the waters.

Economic Growth
• 2- Improved technology for the production of goods and
service.
For example:
Suppose the Alex invented a fish net or a wagon for transporting coconuts. Either
invention would shift her PPC outward.

However, the shift would not be a simple outward expansion of every point along
the PPC.
Technology specific to the production of only one good has no effect if all
resources are devoted to the other good. (a fishing net will be of no use if Alex
produces nth but coconuts). So, the point on the PPC that represents the number
of coconuts that can be produced if there is no fishing will not change.
Economic Growth
• Notes:
• Economic growth means an increase in what the economy can
produce, and it depends on the choices people make.

• For example:
Alex might not choose to produce both more fish and more
coconuts, she might choose to increase the production of only
one good or even choose to produce less of one good.
Economic Growth
• What can cause the PPC shift inward or the economy become
smaller(shrinking)?
• If the economy losses resources and technology as a result of war or
natural disaster.
Economic Growth

Consumer goods: created for direct consumption. Example: pizza

Capital goods: created for indirect consumption. Example: Oven and blenders
If we produce more capital goods there will be economic growth and a shift in the PPC, less
consumer goods now for more later.
Question one: Assume China and
Japan produce hoodies and t.shirts,
using equal amounts of resources,
China can produce 50 hoodies or 100
t.shirts, where as japan can produce
50 hoodies or 200 t.shirts.

a. Assume both China and Japan

experience constant opportunity
costs in producing t.shirts and
hoodies. Draw a correctly labeled
graph illustrating the production
possibilities curves (PPCs) for
China and Japan showing hoodies
on the horizontal axis and t.shirt
on the vertical axis.
Assume China and Japan produce
hoodies and t.shirts, using equal
amounts of resources, China can
produce 50 hoodies or 100 t.shirts,
where as japan can produce 50 Answer:
hoodies or 200 t.shirts. Opportunity cost= 100 t.shirts/50
hoodies= 2 t.shirts
B. Calculate the opportunity cost
of 1 hoodie for china.
Assume China and Japan produce
hoodies and t.shirts, using equal
amounts of resources, China can
produce 50 hoodies or 100 t.shirts,
where as japan can produce 50 Answer:
hoodies or 200 t.shirts. Japan

C. Which country has an absolute

advantage in production of
t.shirts?
 Answer:
Japan has a comparative
advantage in the production of t-
Assume China and Japan produce
hoodies and t.shirts, using equal shirts because it has a lower
amounts of resources, China can opportunity cost of producing a
produce 50 hoodies or 100 t.shirts, t.shirt (0.25 of a hoodie) than
where as japan can produce 50
hoodies or 200 t.shirts. China’s opportunity cost of
producing a t.shirt (0.5 of a hoodie)
D. Which country has a
comparative advantage in the
production of T.shirts? Explain
 Answer:

Yes because the terms of trade fall

Assume China and Japan produce
hoodies and t.shirts, using equal between the opportunity cost of
amounts of resources, China can producing hoodies in the two
produce 50 hoodies or 100 t.shirts, countries ( between 2 t.shirts and 4
where as japan can produce 50
hoodies or 200 t.shirts. t.shirts)

E. If China and Japan specialize

based on comparative advantage
and trade, would they be able to
gain from trade if the terms of
trade are 1 hoodie for 3 t.shirts?
Frappuccino 0 10 20 30 40 50 60

American 210 200 180 150 110 60 0

Question Two: The data provided describe a

coffee shop daily production possibilities for
frappuccino and american coffee.

a. Draw a correctly labeled graph of the store’s

production possibilities curve (PPC) with
frappuccino on the horizontal axis and
american on the vertical axis and label the end
points using the numbers provided above.
Frappuccino 0 10 20 30 40 50 60

American 210 200 180 150 110 60 0

Question Two: The data provided describe a coffee shop daily production
possibilities for frappuccino and american coffee.

B. Is the opportunity cost of Frappuccino increasing?

Yes, as the production of frappuccino increases by the same amount of 10

Frappuccino, the production of american decreases as an increasing rate (oc).
The first 10 Frap cost 10 american, the second 10 frap costs 20 american, the
last 10 frap cost 60 american. Therefore the opportunity cost of producing
Frappuccino increases as more frappuccino are being produced.
Frappuccino 0 10 20 30 40 50 60

American 210 200 180 150 110 60 0

Question Two: The data provided describe a coffee shop daily production
possibilities for frappuccino and american coffee.

C. The store is currently producing 40 frappuccino and 110 american.

Calculate the opportunity cost of increasing the frappuccino production
from 40 to 50.
110-60=50 american coffee
Frappuccino 0 10 20 30 40 50 60

American 210 200 180 150 110 60 0

Question Two: The data provided describe a coffee shop daily production possibilities for
frappuccino and american coffee.

D. Would it be efficient for the store to produce 40 frappuccino for 150 american?
Explain using numbers on the table

It cannot produce 40 milkshakes and 150 american using its available resources, it can
produce 40 frappuccino and 110 american or 30 frappuccino and 15o american but not
a larger combination of both products.
Frappuccino 0 10 20 30 40 50 60

American 210 200 180 150 110 60 0

Question Two: The data provided describe a coffee shop daily production
possibilities for frappuccino and american coffee.

D. Suppose the coffee shop purchases a new machine that increases the
output of frappuccino and american. Show the effect of the change on the
shop’s PPC on your graph in part (a).