1.3: The Production Possibilities Curve and Cost-Benefit Analysis
Using Economic Models
Step 1: Explain Concept In Words
Step 2: Use Numbers As Examples
Step 3: Generate Graphs From Numbers
Step 4: Make Generalizations Using Graph
What Is The Production Possibilities Curve?
production Possibilities Curve (frontier, PPC): A Model That Shows Alternative Ways That An Economy Can Use Its Scarce Resources
Graphically Demonstrates Scarcity, Trade-offs, Opportunity Costs, And Efficiency
4 Key Assumptions
Only Two Goods Can Be Produced
Full Employment Of Resources
Fixed Resources (ceteris Paribus) — 4 Factors
Fixed Technology
Production Possibilities
Constant Opportunity Cost: Resources Are Easily Adaptable For Producing Either Good
Result Is A Straight Line Ppc (not Common)
Law Of Increasing Opportunity Cost: As You Produce More Of Any Good, The Opportunity Cost (forgone Production Of Another Good) Will Increase
Occurs Because Resources Are Not Easily Adaptable For Producing Both Goods
Shifting The Production Possibilities Curve
3 Shifters Of The PPC
Change In Resource Quantity Or Quality
Change In Technology
Change In Trade (allows More Consumption)
Shifting The PPC
Refer To Shifts As “left/right”
More Resources → Higher Production → Shift To The Right
Favoring Capital Goods Increases Consumer Goods (investment)
Just “demand”: Movement Along Line (doesn’t Shift Curve Itself)
Decrease In Workers: Inefficient (point Inside Of Line)
1.3: The Production Possibilities Curve and Cost-Benefit Analysis
Using Economic Models
Step 1: Explain Concept In Words
Step 2: Use Numbers As Examples
Step 3: Generate Graphs From Numbers
Step 4: Make Generalizations Using Graph
What Is The Production Possibilities Curve?
production Possibilities Curve (frontier, PPC): A Model That Shows Alternative Ways That An Economy Can Use Its Scarce Resources
Graphically Demonstrates Scarcity, Trade-offs, Opportunity Costs, And Efficiency
4 Key Assumptions
Only Two Goods Can Be Produced
Full Employment Of Resources
Fixed Resources (ceteris Paribus) — 4 Factors
Fixed Technology
Production Possibilities
Constant Opportunity Cost: Resources Are Easily Adaptable For Producing Either Good
Result Is A Straight Line Ppc (not Common)
Law Of Increasing Opportunity Cost: As You Produce More Of Any Good, The Opportunity Cost (forgone Production Of Another Good) Will Increase
Occurs Because Resources Are Not Easily Adaptable For Producing Both Goods
Shifting The Production Possibilities Curve
3 Shifters Of The PPC
Change In Resource Quantity Or Quality
Change In Technology
Change In Trade (allows More Consumption)
Shifting The PPC
Refer To Shifts As “left/right”
More Resources → Higher Production → Shift To The Right
Favoring Capital Goods Increases Consumer Goods (investment)
Just “demand”: Movement Along Line (doesn’t Shift Curve Itself)
Decrease In Workers: Inefficient (point Inside Of Line)