Notes Production Possibilities Curve
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The document summarizes a production possibilities curve showing the tradeoff between producing pizzas and robots with full employment and productive efficiency. It notes that: 1) As the economy moves along the curve to produce more of one item, it must produce less of the other, with the cost of each additional unit rising. 2) To operate at a point on the curve, the economy must be efficiently allocating its limited resources between the two products. 3) The curve illustrates the law of increasing opportunity costs - the more of one product produced, the greater the costs are in terms of forgone production of the other product.
Notes Production Possibilities Curve
- 1. Notes: Production Possibilities Curve Here is a production possibilities table for Pizzas (in hundreds of thousands) and Robots (in thousands) with Full Employment and Productive Efficiency:Types of ProductionABCDEPizzas01234Robots109740a. Show these data graphically (graph paper is attached). Upon what specific assumptions is this production possibilities curve based?Full Employment and Productive Efficiencyb. If the economy is at point C, what is the cost of one more pizza? One more robot? Explain how the production possibilities curve reflects the increasing opportunity costs.In moving from A to B we find the cost of 1 additional unit of pizza is 1 less unit of robots.But as we pursue the concept of cost through the additional production possibilities – B to C, C to D, and D to E – an important economic principle is revealed: the opportunity cost of each additional unit of pizza is greater than the opportunity cost of the proceeding one. When we move from just A to B, just 1 unit of robots is sacrificed for 1 more unit of pizza; but in going from B to C we sacrifice 2 additional units of robots for 1 more unit of pizza; then 3 more of robots for 1 more of pizza; and finally 4 for 1.Conversely, as we move from E to A, the cost of an additional robot is ¼, 1/3, 1/2 , and 1 unit of pizza.We are discussing marginal (meaning extra) opportunity costs. For example, the marginal opportunity cost of the third unit of pizza is 3 units of robots (= 7 - 4). But the total opportunity costs of 3 units of pizza is 6 units of robots (= 1 unit of robots for the second unit of pizza plus 3 units of robots for the third unit of pizza).Our model illustrates the Law of Increasing Opportunity Costs – the more of a product that is produced, the greater the opportunity cots.c. What must the economy do to operate at some point on the production possibilities curve?