Chapter 5 : Production possibility curves

• PPC curves

  • Can show the opportunity cost of using scarce resources
  • Show the trade-off between producing different goods or services
  • Depict the most efficient combinations of output
  • Illustrate the law of diminishing returns
• Production under and on the PPC is attainable


  Production outside of the PPC is not obtainable
• Moving along the PPC uses the same number and state of resources, shifting production from fewer consumer goods to more capital goods, incurring an opportunity cost
• Economic growth

  • Shown by an outward shift in the PPC curve
  • An increase in the quantity or quality of resources shifts the PPC curve outwards, leading to economic growth
• If the PPC is a straight line, the marginal opportunity cost is constant
• Law of diminishing returns

  The opportunity cost of producing more of one good increases, in terms of the lost units of another good that could have been produced
• Production Possibility Curve (PPC )

  
  

  refers to a simple representation of the maximum level of output that an economy can achieve, given its current resources and state of technology.
• Production below the PPC is inefficient
• Economic decline

  Depicted by an inward shift in the PPC curve
• Producing 100 units of cheese means that only 40 units of yoghurt can be produced instead of the potential 90, resulting in an opportunity cost of 50 units of yoghurt
• Shifting the PPC curve outwards uses more resources or resources of greater quality, reducing the opportunity cost of producing goods
• The concave shape of the PPC shows increasing opportunity cost, where producing more of one good decreases the relative output of another good and leads to a higher loss of output
• Trade off

  refers to what is involved in deciding whether to give up one good for another good.
• Productive capacity

  refers to the maximum output that can be produced when all resources are used fully