econ Production Possibilities curve

Production Possibilities Curve

A graph that shows alternative ways to use an economy’s resource—does not show consumer satisfaction. It is a model of macro economy used to analyze the production decisions in the economy and the problem of scarcity.

Production Possibilities Frontier

the line on production graph that shows the maximum possible output.

Efficiency

using resources in such a way as to maximize the production of goods and services.

Uderutilization

using fewer resources than an economy is capable of using

Cost

to an economist, the alternative that is given up because of a decision— the opportunity cost

Sunk Cost

A cost that cannot be avoided because they have already been incurred

Growth

An economy wants to move the production possibilities curve to the right. It can do so only with growth.R

easons for growth

-Accumulation of capital

-Technological advances

-Increase in population-immigrants, birth rates increase

-Available land or improvements to land

Reasons for decline

-Decrease in population- disease, catastrophe, war, birth rates decline

-Loss of land-war or natural disaster

-Decrease in production due to aging population, more uneducated population, less healthy population.

Two Goods

Resources are used to produce one or both of only two goods. This is a simplifying assumption that makes it easy to display production alternatives using graphs. More than two goods could be analyzed using advanced mathematics.

Fixed resources

The quantities of land, labor,capital, and entrepreneurship resources do not change. This is a reasonable assumption, but it can be relaxed to analyze the consequences of changes in these resources.

Fixed technology

the information and knowledge that society has about the production of goods and services is fixed. This is another reasonable assumption that can be relaxed to analyze the effects of technology changes.

Technical Efficiency

Resources are used in a technically efficient way. That is, the maximum possible is obtained from the resources inputs.

Points on the PPC (point c)

show efficient used of resources—maximum output. Full employment

Points beyond PPC (point b)

Are not attainable given the resource constraint—only after economic growth.

points below PPC(point a)

are feasible, but inefficient. Unemployment

Slope of the line

Opportunity cost is indicated by the negative slope of the production possibilities curve (or frontier). As more of one good is produced, less of the other good is produced. This production reduction is opportunity cost.

Curve of the line

The curve indicates that goods do not change in equal proportions. As the production of one good goes up, the rate of the other decreases by an increasing rate. This is the Law of increasing costs. Rarely there might be a straight line. This means that production changes in equal proportions. As production for one product increases, the other decreases at the same rate. The rate of change is constant.

Law of Increasing Cost

s the production of one good goes up, the rate of the other decreases by an increasing rate.