Production Possibilities Curves and the Key Economic Decisions

 

Production Possibilities

 

Inputs to production: Land, labor, machinery, etc.

 

Outputs: Two mutually exclusive categories to convey tradeoffs—e.g., food and nonfood

:

 

 

Opportunity Cost

 

Opportunity cost of FB – FA units of food = NFA – NFB units of nonfood = Sacrifice

 

Increasing opportunity cost: Opportunity cost of FC – FB units of food (FC - FB = FB – FA) = NFB – NFC units of nonfood > NFA – NFB

 

 

Three Key Economic Decisions

 

  1. How to produce—how to use scarce inputs to produce different outputs

    2.  

  2. What to produce—where to be on the production possibilities frontier

    3.  

  3. To whom to allocate production

 

 

Central Question: Markets vs. Central Authority

 

Market decision making: Individuals free to make any deals they wish

 

Central authority—Authority such as government constrains individual choice

 

 

 

U.S. as a Mixed Economy

 
  1. How to produce—e.g., minimum wages constrain individual choice

    2.  

  2. What to produce—e.g., local and national defense determined legislatively

    3.  

  3. To whom to allocate goods—Social Security, taxation constrain individual choice

 

 

 

Focus of Course: Strengths and Weaknesses of Market Decision Making and Role of Government

 

First step: Understanding how markets function

 

Experiment 1 designed to address