Interpreting the Production Possibilities Curve

Inefficient, Efficient, or Impossible?

If you are a student in BBA2401-macroeconomics, you will find a test question coming from the below topic.

The production possibilities curve shows the effects of scarcity and choice in the economy as a whole. Three situations can be distinguished in figure 2, depending on whether if the production is in the shaded area, on the curve, or outside the curve.

First, imagine production at point I. This point, with 100 movies and 18,000 computers, is inside the curve. But the production possibilities curve tells us that it is possible to produce more computers, more movies, or both with the same amount of resources. For example, a talented movie directors may be working on a computer assemmbly because her short film was not yet been seen by studio executive, or perhaps a financial crisis has prevemted companies from getting loans and thus all production of computer chips.

As you can see, points inside the curve, like point I, are inefficient because the economy could produce a larger number of movies, as point D, or a larger number of computers as at point B. Points inside the production possibilities curve are possible, but they are inefficient.

Second, consider the points on the production possibilities curve. These points are efficient. They present the maximum amount that can be produced with available resources. The only way to raise the production of one good is to lower production of the other good. The points on the curve shows a tradeoff between one good and another.

Third, consider points to the right side and above production possibilities curve, like point J in Figure 2. These points are impossible. The economy does not have the resources to produce those quantities.

Unit I Key Terms

Chapter One Key Terms

choice: a selection among alternative goods, services, or actions.

command economy: an economy in which the government determines prices and production; also called a centrally planned economy.

comparative advantage: a situation in which a person or group can produce one good at a lower opportunity cost than another person or group.

division of labor: the division of production into various parts in which different groups of workers specialize.

economic interaction: exchanges of goods and services between people.

economics: the study of how people deal with scarcity.

freely determined price: a price that is determined by the individuals and firms interacting in markets.

gains from trade: improvements in income, production, or satisfaction owing to the exchange of goods or services.

government failure: a situation in which the government makes things worse than the market, even though there may be market failure.

incentive: a device that motivates people to take action, usually so as to increase economic efficiency.

increasing opportunity cost: a situation in which producing more of one good requires giving up an increasing amount of production of another good.

international trade: the exchange of goods and services between people or firms in different nations.

market: an arrangement by which economic exchanges between people take place.

market economy: an economy characterized by freely determined prices and the free exchange of goods and services in markets.

market failure: any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government.

opportunity cost: the value of the next-best forgone alternative that was not chosen because something else was chosen.

production possibilities: alternative combinations of production of various goods that are possible, given the economy's resources.

production possibilities curve: a curve showing the maximum combinations of production of two goods that are possible, given the economy's resources.


scarcity: the situation in which the quantity of resources is insufficient to meet all wants.

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Chapter Two Key Terms

capitalism: an economic system based on a market economy in which capital is individually owned, and production and employment decisions are decentralized.

ceteris paribus: "all other things being equal"; refers to holding all other variables constant or keeping all other things the same when one variable is changed.

circular flow diagram: a diagram illustrating the flow of funds through the economy as people buy and sell in markets.

controlled experiments: empirical tests of theories in a controlled setting in which particular effects can be isolated.

Council of Economic Advisers: a three-member group of economists appointed by the president of the United States to analyze the economy and make recommendations about economic policy.

economic model: an explanation of how the economy or part of the economy works.

economic variable: any economic measure that can vary over a range of values.

experimental economics: a branch of economics that uses laboratory experiments to analyze economic behavior.

gross domestic product (GDP): a measure of the value of all the goods and services newly produced in an economy during a specified period of time.

macroeconomics: the branch of economics that examines the workings and problems of the economy as a whole—GDP growth and unemployment.

microeconomics: the branch of economics that examines individual decision-making at firms and households and the way they interact in specific industries and markets.

mixed economy: a market economy in which the government plays a very large role.

negatively related: a situation in which an increase in one variable is associated with a decrease in another variable; also called inversely related.

normative economics: economic analysis that makes recommendations about economic policy.

positive economics: eco-nomic analysis that explains what happens in the economy and why, without making recommendations about economic policy.

positively related: a situation in which an increase in one variable is associated with an increase in another variable; also called directly related.

relative price: the price of a particular good compared to the price of other things.

socialism: an economic system in which the government owns and controls all the capital and makes decisions about prices and quantities as part of a central plan.


End of Unit I Key Terms.

Production Possibilities and Technology

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What is the opportunity cost of attending an 8 a.m. economics class?

To answer this question, think of all the other activities you could do at this exact time, and rank these choices (from most preferred to least preferred).

At 8 a.m., you could sleep a bit more, have a longer breakfast, take more time to walk to school, watch the early morning news, etc.

Since you made a choice to come to your 8 a.m. economics class, then the best alternative that you DID NOT choose is your opportunity cost. If you value sleep the most, then sleeping is your opportunity cost.

Note: Since you cannot do all of the other activities at the same time, it is incorrect to state that all of those activities are your opportunity cost of attending your 8 a.m. economics class.

The opportunity cost of attending class at 8 a.m., or of any activity differs across individuals. My opportunity cost of attending class at 8 a.m. may be eating breakfast, while for you, it may be taking a longer shower.



Opportunity Cost (of a choice): the value of the best alternative that was not chosen because something else was chosen.


Production Possibilities: alternative combinations of production of various goods that are possible, given the economy’s resources.

To simplify the concept of production possibility, let us think for a moment that the production of an economy can be divided into two broad categories. Suppose the economy can produce either computers (laptops, desktops, servers) or movies (thrillers, love stories, mysteries, musicals). The choice between computer and movies is symbolic of one of the most fundamental choices indiiduals in a society must face: how much to invest in order to produce more or better goods in the future versus how much to consume in the present. Computers can help produce more or better goods. Movies are a form of consumption. Other pairs of goods could also be used to illustrate this exaple. As you can see, with the scarcity of resource such as labor and capital, there is a choice between producing some goods, such as computers, versus other goods, such as movies. If an economy produces more of one, then it must produce less of the other. The below table gives us an example of alternative choices, or the production possibilities, for computers and movies.

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Table 1 Production Possibilities.


Opportunity CostsIncreasing Opportunity Costs: a situation in which producing more of one good requires giving up an increasing amount of production of another good.


Why do opportunity costs increase?
Some of the available resources are more suited in producing one good than another. In our example above, some of the available resources are better suited for movie production than computer production,and vice versa. Workers who are good at computer building might not be good at acting, for example, or movie making may requie an area with a dry sunny climate. As more and more resources go into making movies, we are forced to take resources that are much better at computer making and use them for movie making. Thus more and more computer production must be lost to increase movie production by a given amount. Adding specialized computer designers to a movie cast would be very costly in term of lost computers, and it might add little to movie productions.

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Figure 2: The Production Possiblity Curve

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Each point on the curve shows the maximum number of computers than can be produced when a given amount of movies is produced. The points with letters are those in Table 1. and are connected by smooth lines. Points in the shaded are inside the curve are inefficient. Points outside the curve are impossible. For the efficient points onthe curve, the more movies that are produced, the computers are produced. The curve is bowed out because of increasing opportunit costs.

Will it Work?

The blog is still in its very initial stage of implementation. Only a few students were informed about it. I did not want to add something new that was not a requirement in their syllabus. But now, I think it will be interesting to see what students think of it. Following this blog will not be mandatory but it will certainly help students interpreting terms that they will face in their exams. I will request the professor to send a group email to her students in their first week of class and inform them about this blog.

People that were interested in my topic

I was able to find some people that were interested in my blog. First of all, course professor Zinia Akbar was interested in finding out how this blog could help her students. Later, CSU Undergraduate Business Related Chair Doug Marker showed interests in viewing my blog. Zinia did not email her students about the blog but I emailed only one student and she visited the blog during the first week of her class.

Clifton Castelman, an Instructional Designer, who is working on his MS in Economics online has suggested that I include Heiti's emergency relief plan as a learning activity in this course.

Barriers That I Encountered:

a) Using Tiger Woods: My initial barrier was organizing Tiger Woods' academic and sports background, and incorporating them in the economic lectures. First I thought to remove him from the lessons but later, I kept him in the lectures related to his succsess in life as ss examples of instructional compoments. After his recent scandal, many of Tiger Woods' sponsors did not continue their contracts to use him to endorse their products. However, I continued to use Tiger Woods as an example in economic development because the assigned textbook (2010 edition) for BBA 2401 utilizes him as examples in many economic terms.
b) Textbook Chapters: Initially, I was reluctant in using chapters 1 and 2 diectly from the textbook but later, I received the publishers authorization to use those chapters because the university purchased the book to use specifically for the course.

c) Youtube videos: My plan was to upload some video clips in youtube so that students can watch them and post their comments. These videos came with the texbook and discussed the way economy and happiness are related and elaborated on the happiest nation on earth. But I did not receive the permission from the publisher because those video clips were desiged and developed by ABC news and Cengage Publisher was authorized to use them only in their textbook and not to upload them in youtube. I created linked to other youtube videos that covered similar topics instead of uploading my own.