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The Production Possibility Curve - Coggle Diagram
The Production Possibility Curve
Assumptions of the PPC
quantity & quality of the resources used remain the same over the specific time period
resources are fully employed and efficiently utilised
production is observed over a specific time period (e.g. 1 year)
there is no change in the level of tech
economy produces only 2 goods
Concept of Increasing Opportunity Cost
PPC is concave to origin --> as more of a good is produced, increasing quantities of the alt. good must be sacrificed
resources in economy are not entirely suitable to production of both goods
when economy focuses on production of 1 good, less and less suitable resources must be used (these less suitable resources would have been better at producing other goods)
when more units of a good are produced, increasingly greater amounts of resources must be taken from alt. good --> greater amt. of alt. good must be sacrificed
Economic Growth
Potential Economic Growth
long-run growth
outward shift of PPC
caused by
increase in quantity of resources
e.g. inc. in size of labour force, inc. in amt. of land, inc. in capitol stock
improvements in quality of resources
e.g. inc. in skills & education levels of the labour force
tech advancements
e.g. use of tools, machines & materials, as well as plans & procedures that aid in the production of goods & services
Actual Economic Growth
short-run growth
increase in one good w/o fall in the other
Shifts of the PPC
Outward Parallel Shift
resource/tech. advancements whose availability are altered are perfectly adaptable to the production of both goods (Fig. 5(b), pg 19 ch1 notes)
Outward Skewed Shift
resource/tech. advancements are better suited to one good --> shift on one axis greater than the other --> skewed curve skewed (Fig. 5(a), pg 19 ch1 notes)
Effects of Size of Capitol (refer to Fig. 6, pg 20 ch1 notes)
capital goods > consumer goods
higher possible output in future
increase level of future consumption
certain amt. of current consumption must be sacrificed
relatively greater inc. in productive capacity
capital goods < consumer goods
relatively smaller inc. in productive capacity
lower possible output in future
lowered level of future consumption
higher level of consumption in current time period
Illustrates
(refer to Fig. 3, pg 14 of ch1 notes)
Scarcity
unattainable combinations outside PPC as society has limited resources
e.g. points J, K & L
Unemployment & Underemployment
points inside PPC --> max output with given resources is NOT produced
e.g. points A, B & C
UNemployment: not all available resources are used in production of goods & services
UNDERemployment: resources are engaged in production but operating below potential capacity
Productive Efficiency
lies on the PPC --> resources fully employed
e.g. points D, E, F, G, H & I
Choice
society must choose which production point it wants to be at, and cannot be at two production points at the same time
e.g. points A, B, C, D, E, F, G, H & I
Opportunity Cost
illustrated by negative, downward slope of PPC
society must give up some of 1 good to have more of alt. good
Allocative Efficiency
illustrated by 1 point along PPC which has a combination of goods that gives a society max welfare
based on the tastes & preferences of society
may change with time, just as people's tastes & preferences change
