Production Possibilities

The Production possibilites curve represent several different factors. Figure 1.1 represents the basic idea of scarcity that all societies and economies face. Limited resources allow for a maximim of 20 tonnes of wheat if there are no cars produced. The further down the curve you move, the less wheat and more cars are produced, until there are maximum productoin of cars and no wheat. An economy is said to be operating inside their production curve when they are underemploying their available amount of resources, using them inefficiently, or inappropriately using technology. Figure 1.2 is an increasing Costs production curve. As one comodity is produced less, the other is produced more. With the increased production comes the law of increasing costs: As an economy's production level of any particular item increases, it's per unit cost of production rises. This is beacuse the resources of the less producing will need to be re allocated to the more producing item because a larger sacrifice of wheat production will be required.

Figure 1.3 represents the effect that technological change has on the production curve.Improved technology causes the production curve to shift. But where to? If the same amount of capital goods are produced, the curve will shift out only. If both consumer and capital good production are increased, the the curve will move diagonally upwards and if only the capital goods increase, the curve will move up in a straight line.

Figure 1.4 shows which icrease of good production (capital or consumer) will cause the most growth. Increased production of capital goods allow for more economic growth than increased production of consumer goods. This is because increased capital goods cause the curve to shift out more over time.

Opportunity cost is the sacrifice of one item for the aquisition of another. Let's look at an example. You may wish to put a tidy sum of money away for future growth. All of my past and current invested money has been low risk, low growth. As I'm in school while working and still trying to build my finances, it wouldn't be wise for me to throw any extra money into high risk investments right away. I like collecting my principle investments and savings plus a small interest, guarenteed at the end of a set term. Simply put, I can't afford to lose much of the money I'm putting away. The opportunity cost of these guarenteed savings is the potential for higher yields through a riskier investment. I lose out on the chance to make big money in a short period of time through speculative stocks. I can't have both high returns and guarentee of returns. I must sacrifice one or the other at this point in time. If you are a student, surely you will understand. Living on my own is great, but I must work full time to afford this luxury. In order to advance my current career, I must also aquire higher education. Working full time comes at the opportunity cost of being done school quicker. I can't get a degree in four years and work full time. This is scarcity (of time) in it's simplest form.