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