C3: Production Possibility Curve
PPC
It shows all the possible combinations of the maximum production of 2 goods, that can be produced by an economy in a given state of technology in a given time period.
Assumptions
The state of technology does not change
There is only 2 goods
All FOP fully utilized
A fixed amt of FOP
Interpreting PPC
Scarcity
Points OUTSIDE of the curve are unattainable
Not able to reach that level of production because of limited resources
Choice
Choosing any point ALONG the curve
There is a need to choose how much of each good they want to produce
Trade off
There has to be a trade-off choosing between the 2 goods to produce. When deciding to produce more of Good A, we have to divert our limited resources away from Good B.
Moving ALONG the curve
Productive Efficiency
Anywhere ON the curve
When all available resources are fully and efficiently utilized to achieve maximum output
Allocative Efficiency
SPECIFIC point ON the curve
The allocation of resources that to produce the combination of goods and services most wanted by the economy, where society's welfare is maximized
Real Economic Growth
Potential Economic Growth
Actual increase in the production of goods and services
Moving from INSIDE the curve to a HIGHER point
When current idle resources are made active
Increase in productive capacity
Curve shifts OUTWARDS
Increase in Quantity or Quality of FOP or Tech
Shape of PPC
How does it show increasing opportunity cost?
Assume we start at the very top of the PPC, where economy producing only Good A
To produce the 1st good of Good B, we have to sacrifice 1 of Good A
To produce the 2nd Good B, we have to give up 2 Good A now. (So now we lost 3 Good As for 2 Good Bs)
Continues along the curve
Why does opportunity cost increase?
FOPs are not homogenous --> not equally well in producing ANY good
E.g. a baker would be better at food production than woodwork
As more of wood is to be produced, FOPs that are better suited for food production are used to make more wood, thus opportunity cost increases
Benefit of Specialization and Trade
If a country has a comparative advantage, they should produce more of that good.
Trading will allow these surpluses of goods to be sold to other countries for other products
Will allow people to consume at a point OUTSIDE of the PPC (WOW), increasing SOL