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ModULE 1.2
building economic models, it is important to make the other things equal assump- The other things equal
tion, which means that all other relevant factors remain unchanged. Sometimes the assumption means that all
Latin phrase ceteris paribus, which means “other things equal,” is used. other relevant factors remain
It isn’t always possible to find or create a small-scale version of the whole economy, unchanged. This is also
and a computer program is only as good as the data it uses. (Programmers have a say- known as the ceteris paribus
ing: garbage in, garbage out.) For many purposes, the most effective form of economic assumption.
modeling is the construction of “thought experiments”: simplified, hypothetical ver-
sions of real-life situations.
Models can also be depicted by graphs and equations. In this Module, you will
see how graphical models illustrate the relationships between variables and reveal
the effects of changes in the economy. One such graph is the production possibilities
curve, a model that helps economists think about the choices to be made in every
economy.

Trade-offs:

The Production Possibilities Curve

The true story of Alexander Selkirk may have inspired Daniel
Defoe’s 1719 novel about shipwrecked hero Robinson Crusoe.
In 1704, Selkirk was a crew member on a ship that he correctly
feared was not seaworthy. Before the ship met its fate at the
bottom of the sea, Selkirk quarreled with the captain about the
need for repairs, and then abandoned the ship during a stop
at a deserted island near Chile. As in the story of Robinson
Crusoe, Selkirk was alone and had limited resources: the nat-
ural resources of the island, a few items he brought from the
ship, and, of course, his own time and effort. With that, he had
to make a life for four and a half years. In effect, he became a SJ Travel Photo and Video/Shutterstock
one-man economy.
One of the important principles of economics we intro-
duced in Module 1 was that resources are scarce. As a
result, participants in any economy — whether it contains one person or millions of
people — face trade-offs. For example, if castaways on a tropical island devote more
resources to catching fish, they benefit by catching more fish, but they cannot use
those same resources to gather coconuts, so the trade-off is that they have fewer
coconuts.
To think about the trade-offs necessary in any economy, economists often use the
production possibilities curve model. The idea behind this model is to improve our The production possibilities
understanding of trade-offs by considering a simplified economy that produces only curve illustrates the necessary
two goods. This simplification enables us to show the trade-offs graphically. trade-offs in an economy that
Figure 1.2-1 shows a hypothetical production possibilities curve for Alexis, a cast- produces only two goods. It
away alone on an island, who must make a trade-off between fish production and shows the maximum quantity of
coconut production. The curve shows the maximum quantity of fish Alexis can catch one good that can be produced
during a week given the quantity of coconuts she gathers, and vice versa. That is, it for each possible quantity of the
other good produced.
answers questions of the form, “What is the maximum quantity of fish Alexis can catch
if she also gathers 9 (or 15, or 30) coconuts?”
There is a crucial distinction between points inside or on the production possibili-
ties curve (the shaded area in Figure 1.2-1) and points outside the curve. If a production
point lies inside or on the curve — like point C, at which Alexis catches 20 fish and gath-
ers 9 coconuts — it is feasible. After all, the curve tells us that if Alexis catches 20 fish,
she could also gather a maximum of 15 coconuts, so she could certainly gather 9 coco-
nuts. Production inside the curve indicates that resources are underutilized, which can
mean that land or capital lies idle or that workers are unemployed. A production point
outside the curve — such as point D, which would have Alexis catching 40 fish and

Module 1.2 Opportunity Cost and the Production Possibilities Curve Model 11
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