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

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

  5. 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

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

  5. 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