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Production Possibilities Curve (Terminologies (Capital goods (Machinery…
Production Possibilities Curve
Shows all possible combinations of 2 goods that an economy can produce
Conditions (Fixed)
Period
State of technology
Resources
Efficiency of usage
Amount available
Goods produced
Terminologies
Capital goods
Machinery and equipment used to produce consumer and other capital goods
Consumer goods
Consumed by people, yields satisfaction
Scarcity
Unattainable conditions
Choice
Need to choose among alternative combinations along PPC (OC is made)
Opportunity cost
Negative slope of PPC
Types of Boundaries
Above
Unattainable due to scarce resources
Below
Underemployment
Resources engaged in production, below potential
Unemployment
Some resources not used at all (a.k.a. wastage)
No opportunity cost incurred
Resources remain unemployed
On the line
Full employment, efficient use of resources (allocative efficiency)
Downward sloping
To produce more of consumer goods, some capital goods have to be sacrificed
Flat/straight
Constant OC
Resources used to produce 2 goods are similar and equally suitable
Concave
Law of increasing opportunity cost
To get equal additional amount of one good, society must sacrifice ever increasing amount of other goods
Resources not equally suited for producing different commodities
Economy concentrates more on production of consumer goods
Eventually have to use less suitable resources for producing consumer goods (but better suited for producing capital goods)
Increasingly more resources used to produce additional equal amounts of consumer goods
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