Khan Academy AP Mac Unit 1: Lesson 2

Opportunity Cost And The Production Possibilities Curve

Production Possibilities Curve

(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

Opportunity Cost

the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.

Efficiency

the full employment of resources in production; efficient combinations of output will always be on the PPC.

Inefficient use (Under-utilization) of resources

the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.

growth

an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.

Contraction

a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.

Constant Opportunity Cost

when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.

Increasing Opportunity Cost

when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up 2 fidget spinners when she produces the first Pokemon card, and 4 fidget spinners for the second Pokemon card, so she has increasing opportunity costs.

Productivity

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.