1. society

Resources and Production Possibilities Model
Chapter 1 Section 3
Mr. Henry
AP Economics
Scarcity: Fundamental economic problem of meeting people’s
virtually unlimited wants w/ scarce resources
How a society decides what to
produce using their limited
resources because a society
cannot have everything
How a society determines how
to produce an item, whether
using people or machines, or
both
The society must decide who
will receive the things
produced
Within our society, what are examples of choices
society must make with its limited resources?
The factors of production, or resources required to produce
the goods & services we would like to have, are land,
capital, labor, and entrepreneurs.
Land:
natural resources or other “gifts of nature” not created by human effort
ie arable land, forests, mineral & oil deposits, and water resources
Capital:
sometimes called capital goods, includes all manufactured aids used in the production of
consumer goods and services (factories, storage, transportation, tools, and machinery)
Labor:
people with all their efforts, abilities, and skills
(both physical & mental – ie teacher, farmer, physicist)
Entrepreneurs:
risk-taking individual in search of profits
Combines resources of land, labor, and capital
The production possibilities frontier is a diagram
representing the maximum combinations of goods and/or
services an economy can produce when all productive
resources are fully employed.
What points on the graph represent maximum
combinations of output if all resources are fully
employed?
What point on the graph would represent if
resources are idle, possibly due land/factory not
being used, a strike, or possibly a natural disaster?
Which point do you think represents production
cannot be reached due to no extra resources (such
as workers, supplies)?
What do you think has to happen if a country is
producing at point A but wants to achieve
production at point B?
In a production possibilities table, we see
the different combinations of two products
that can be produced within a specific set
of resources, assuming full employment.
At any point in time, a fully employed
economy must sacrifice some of one good
to obtain more of another good. Scarce
resources prohibit such an economy from
having more of both goods. Society must
choose among alternatives! Having more
of one thing means having less of
something else…so there is no such thing
as a free puff or free shed!
The data in the production possibilities
table are shown graphically as a production
possibilities curve.
Notice the vertical axis are the crab puffs
and the horizontal axis are the storage
sheds.
This examples shows the law of increasing
opportunity costs. As the production of a
particular good increases (a shed), the
opportunity cost of producing an additional
unit increases.
The slope of a line is measured by calculating the change in the value measured on the vertical axis
divided by the change in the value measured on the horizontal axis. Another way of saying this is to divide
the rise by the run.
For the production possibilities curve to the right, this is the change in the quantity of crab puffs (rise)
divided by the change in the quantity of storage sheds (run).
Here is a handy formula for calculating the slope of the production possibilities curve.
Slope = rise/ run
(slope = change in crab puffs / change in sheds)
For example, the slope of the production possibilities curve between points I (8 sheds and 270 dozen crab
puffs) and J (9 sheds and 200 dozen crab puffs) is -70. The rise is a decrease of 70 and the run is an
increase of 1.
slope, I to J = change in crab puffs / change in sheds
= -70 / 1 = -70
270-200
70
----------- = ----8-9
-1
Optimal Allocation
Remember Marginal Analysis compares marginal benefits
and marginal costs, meaning “extra” or “additional”. With
the production possibilities curve, we can use the data to
try and determine what specific quantities of resources
should be allocated to crab puffs and storage sheds in
order to maximize satisfaction.
Test
Preparation:
1) Using the diagram above, which of the following might
have caused the outward movement of the production
possibility frontier?
A.
B.
C.
D.
E.
A decrease in the availability of fertile farmland
A plague of destructive grasshoppers
An increase in the productivity of the labor force
A severe and long-lasting drought
A decline in the rate of technological improvements
C - An increase in the productivity of the labor force
Robots
Pizza
10
0
9
100
7
200
4
300
0
400
a. Draw the production possibilities frontier for this economy
(put robots on the vertical axis)
b. Indicate the area of unattainable production combinations
c. Indicate the area of production combinations attainable with
some resources employed
d. Calculate the per-unit opportunity cost for increasing pizza
production from zero to 100 units
What you give up You have to give up 10 apples to get 4 oranges 10
5
Opp. Cost = ----------------------- - - = - - - = 2.5
What you gained
4
2
So for 1 orange you have to give up 2.5 apples!