1.3 Opportunity Cost

• The production possibility curve(PPC) shows the different combinations of two goods that can be produced using full employment of resources
• Opportunity costs - The value of the next best alternative forgone.
• Production Possibility curve frontier - Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed.
• Trade off - When one thing is lost to gain something else
• PPC

  • The axis show the two possibilities
  • A B C are the most efficient because they are on the PPC indicating the maximum output when utilising all current resources ( shows productive and allocative efficiency ).
  • D is inefficient (not all resources are being utilised)
  • E is not achievable with current resources.

  
• The PPC will shift out if you

  have more factors of production

  the factors of production become more productive

  the state of technical knowledge advances.
• If you just have improvement in the ability to produce one type of good (e.g. capital) then the PPC will only shift in that axis.
• • The PPC can show the choice (opportunity cost) between any two goods or services.