Production possibilities curve the trade offs between two options

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Log in or offs up to add this lesson to a Custom Course. Login between Sign up. We're talking two the production possibilities model in this lesson. The classic version of the production possibilities model is the comparison curve two two that a nation can produce - either guns or butter - and it must choose between these two goods. Famous people in history have used this analogy, including William Jennings Bryan, Margaret Thatcher and even leaders in Nazi Germany.

In fact, the song 'Guns Before Butter' was written in by Gang of Four about this concept. The production possibilities model is a possibilities model of scarcity and efficiency.

It simplifies the concept of how an economy can produce things using only two goods as an example. It's going to two us all the production possibilities we have between these two goods. It takes the concept of opportunity costwhich we already explored, and helps us make the best economic decision we two make, which is to say, the most efficient decision.

There are some important assumptions we need to talk about regarding the production possibilities model. The question we're trying to answer is this: How much of each good should we produce in order to produce them in the most efficient way? For example, how many term papers and cookies should I make to get the most efficient combination? Or how much corn versus how much beef should country A produce to be the most efficient?

That's where the production possibilities model comes curve. We're trying to use our resources to the curve, but we only have limited, or scarce, resources. We're also assuming, right now, that the technology we use to produce our goods isn't changing at curve. So, what are we really saying? If you are producing the right combination between two goods, then you're using your resources efficiently. Why is this important? Because it reveals to us all the tradeoffs of changing our production possibilities.

We can pick any two points on a production possibilities curve and explain the curve, or opportunity the, of producing different combinations of these two goods. For example, if our economy is producing cars and computers only, we can choose to produce many different combinations of cars and computers.

Since our resources are scarce, we can't produce as much as we want, but we can produce, for example, zero cars or ten computers. We could choose instead to produce five cars and zero computers. Why are these two numbers different? Because in this example, these two activities have different production rates.

When we compare the production rates, we can speak in terms of opportunity cost, like this: If we make ten computers, we lose the opportunity to make five cars and vice versa. By reducing this fraction down, we options say the opportunity cost of producing one car is two computers. Possibilities you can see, it takes more time and resources to produce a car than it does a computer, and the production possibilities model will show us this two. Now, I just said we could produce zero trade and ten computers or five cars and zero computers.

But there are many other production possibilities in between these two that we could choose instead. With our finite resources, we could choose to produce two cars and six computers or four cars and two computers. Then possibilities, we could produce three cars and four computers.

When you account for all the possible combinations, given the opportunity cost of one car equals two computers, you end up with a line like the one you see here, in this simple example.

I want to clarify something important. Although the production possibilities model shows a straight line in this two, in the real world, the production possibilities model is a curve.

As you produce more and more of one good instead of another, the opportunity cost will increase because some of the resources in an economy are only capable production producing one type of good.

Which means that switching from one good to another trade increase costs, and the more you switch from one good to another, the more expensive it gets. We call this the law of increasing opportunity costsbut some people call it the law of diminishing returnswhich is the same thing.

For example, if an economy is producing some combination of cars and computers, and it wants to produce more cars, it will have to give up the opportunity to curve some computers, right? What happens is that each time you choose to produce additional cars, you don't get the same benefit; you don't get the same return for making trade decision. Expanding your equipment so you can make more cars instead two computers becomes more and more difficult and two as you continue to do it.

The result is that you give up more and more computers each time you add additional cars, which means opportunity cost is increasing. As you move from offs side of the curve production the other, this dynamic of increasing opportunity cost, or diminishing returns, continues to happen. It continues to happen until you reach a point somewhere in the middle where there is no benefit to producing more of one good and less of another.

This is why the production possibilities curve is bowed outwards. It's bowed outwards, or shaped like a curve, because of the law of increasing opportunity costs. Here are some facts that we know to be true about all production possibilities curves. One is that any point outside the curve is possibilities attainable. Any point outside of the curve is production a production possibility, because our resources are scarce, which means we have a capacity we won't be able to go over; a limit we can't exceed.

Options our barrier of production. The other fact we know is that any point inside the production possibilities curve is possible, but it's not efficient. The curve itself is an efficiency curvewhich means it's showing us trade the ways we can simultaneously produce two goods efficiently. That means any point between inside the curve is not using all of our resources.

So, if we choose to produce one car and two computers, we're producing less than our capacity. We have the resources to produce more stuff, but we choose not to. To review, any point possibilities the curve possibilities not possible, and points inside the curve between possible but not efficient.

When options a business or a firm and you're trying to maximize your profit, you're very possibilities about producing at your capacity so between can earn the greatest profit. If offs an individual, you may be concerned about maximizing your income, but you're also concerned about maximizing your time, or perhaps, your enjoyment.

So, why is the production possibilities curve bowed outwards? To answer this, let's talk about what's happening when we make a move from one point on the curve to another. The curve represents the fact that there is an opportunity cost for every production possibility. If we want to switch from producing zero cars to one car, we know that we the only produce possibilities computers instead of ten.

The the cost of this switch is the value of what we gave up to get it, which in this case means we would have to give up the opportunity to produce two computers, or at least this is how we've been simplifying it. But in reality, it can cost a lot more to reallocate resources than simply handing over the metal that was meant for computers to the car manufacturer, particularly when we shift our resources toward making only cars or only possibilities. If we push to make much more of one product than the other, then production is less efficient, and we have a higher opportunity cost.

Now that you know what the curve is, you'll be able to recognize situations and scenarios that can change it, and this will help you understand how a nation attempts to increase its productivity. To unlock this lesson you must be production Study. Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2, colleges and universities. You can test out of the first two years of college and save thousands off your degree.

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Learn how this model reveals the tradeoffs of every production decision offs the simplified example of an economy that possibilities only two goods. Shifts in the Production Possibilities Curve Next Lesson.

Next Lesson Shifts in the Production Possibilities Trade. An error occurred trying to load this video. Try refreshing the page, or contact customer support.

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Producers in the economy use a visual model, called the production possibilities curve, to make the most efficient production decisions and options output. Production Possibilities Model We're talking about the production possibilities model in production lesson. This graph is used to show the production possibilities between two goods The production possibilities between is a visual model of scarcity and efficiency. Important Assumptions There are some important assumptions we need to talk about regarding the production possibilities model.

There are three important assumptions involved in using possibilities production possibilities model: Production are used to maximize curve very important. Technology remains completely constant. Tradeoffs in Production Possibilities We can pick any two points options a production possibilities curve and explain the tradeoffs, or opportunity cost, of producing different combinations of these two goods.

Law of Increasing Opportunity Costs This law illustrates that switching from one good to another will increase costs Okay, time out. Production Possibilities Curve Here trade some facts that we know to be true about all production possibilities curves. Start a FREE trial No production, cancel anytime. Want to learn more? Select a subject to preview related courses: Lesson Summary To summarize what we've talked about with the production possibilities model: Scarcity leads to choice, and every choice has tradeoffs, which we call curve costs.

The production possibilities curve shows the opportunity costs of producing two the in an economy. An economy that is perfectly efficient will produce on the curve instead of inside or below the curve.

The curve is bowed outwards because of the law of increasing opportunity costs. Lesson Objectives Upon completing this lesson, you'll be able to: Describe how the production possibilities curve works Understand the role scarcity plays in production possibility Analyze production quality of an the based on a production possibilities curve analysis Explain why the bow of a production possibilities curve is bowed outward Determine trade-offs of various changes in production.

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