ECO 203/204
Chapter 2
PRODUCTION POSSIBILITIES
OVERVIEW
The problem of scarcity forces all societies to decide what goods to
produce, how to produce them, and for whom. The allocation problems posed
by scarcity are addressed by the economic systems developed for that purpose
by each nation. Just as political systems differ between nations, so do
the economic systems upon which their material well-being is based.
The United States relies on the market system to make most of its economic
decisions. Other nations, such as the China, emphasize the directive
role of governmental ministries.
Outline
I. The Production Possibilities Curve
The production possibilities curve in a line revealing the maximum combinations of
the goods that can be produced with a given quantity of resources, assuming that
technology is fixed.
Technology is the body of knowledge encompassing techniques for transforming resources
into output.
A. Scarcity
1. Given scarcity, the production possibilities curve represents
the boundary between feasible and non-feasible outcomes
2. Scarcity limits feasible production to points on or below the
production possibilities curve
B. Efficient Production
1. Points below the production possibilities curve represent
inefficient production
2. The production possibilities curve consists of points that are
both feasible and efficient
C. Trade-Offs
1. Efficient production means operating on the production
possibilities curve
2. If production is efficient, a nation must give up some of one
good to produce more of another good
D. Opportunity Cost
E. The Law of Increasing Costs
1. The hypothesis holds that the opportunity cost of a good rises
as the quantity of the good produced increases
2. Increasing opportunity costs create a bowed production
possibilities curve
F. Shifting the Production Possibilities Curve
1. An increase in resources shifts the production possibilities
curve outward
2. Technological advancements shift the production possibilities
curve outward
G. Economic Growth
1. Economic growth, the ability to produce greater levels of
output, is evidenced by an outward shift of the production
possibilities curve
2. Economic growth occurs when a country increases its resources
or develops new technologies
a. Capital goods are output used to produce other goods
b. Consumer goods are consumed directly
3. A country accelerates economic growth by increasing the ratio
of capital goods to economic goods
ECO 204