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MODULE 1.2 opportunity Cost and the

Production Possibilities

Curve Model

In this Module, you will learn to:
• Summarize the crucial role of models as simplified representations of economic
realities
• Explain how the production possibilities curve graph illustrates trade-offs
• Use the production possibilities curve model to illustrate scarcity, efficiency, and
opportunity cost
• Explain how changes in technology and the availability of resources influence
economic growth and the production possibilities curve

A good economic model, like a good street map app, can be a tremendous aid
to navigating complex situations. In this Module, we look at one such model,
the production possibilities curve, a model that helps economists think about
the trade-offs necessary in every economy. The production possibilities curve
helps us understand three important aspects of the real economy: efficiency,
opportunity cost, and economic growth.

The Use of Models in Economics

In 1901, one year after their first glider flights at Kitty Hawk, the Wright
brothers built something else that would change the world — a wind tunnel.
This apparatus let them experiment with many different designs for wings and
control surfaces. These experiments gave them knowledge that would make
heavier-than-air flight possible. Needless to say, testing an airplane design in
a wind tunnel is cheaper and safer than building a full-scale version and hop-
ing it will fly. Today, pilots train with flight simulators and cockpit models
that allow them to practice maneuvers without ever leaving the ground. Like-
wise, models play a crucial role in almost all scientific research — economics
included.
A model is any simplified version of reality used to better understand a real-
life situation. But how do we create a simplified representation of an economic
situation? One possibility — an economist’s equivalent of a wind tunnel — is to
find or create a real but simplified economy. For example, economists inter-
Yolanda Cossio ested in the role of money have studied the system of exchange that developed
in World War II prison camps, in which cigarettes became a universally accepted

Economic models help us navigate form of payment, even among prisoners who didn’t smoke.
Another modeling option is to simulate the workings of the economy on a
complex situations, just as this mapping computer. For example, when changes in tax law are proposed, government offi-
app lets us navigate a city.
cials use tax models — large mathematical computer programs — to assess how the
proposed changes would affect different groups of people.
A model is a simplified Models are important because their simplicity allows economists to focus on the
representation used to better influence of only one change at a time. That is, they allow us to hold everything else
understand a real-life situation. constant and study how one change affects the overall economic outcome. So when

10 Macro • Unit 1 Basic Economic Concepts
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

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