Production Possibilities Curve (PPC) Model

Unit 1, Introduction to economics

Economics

Economics is the study of the choices of how to make the best possible use of limited

resources (or factors of production) to satisfy unlimited human needs and wants. These

choices create opportunity costs.

Economic well-being

A multidimensional concept relating to the level of prosperity and quality of living

standards in a country.

Efficiency

In general, it involves making the best use of scarce resources. May refer to producing at

the lowest possible cost or to maximum social surplus (to be continued).

Scarcity

The tension between the availability of economic resources (natural resources, labour,

capital goods and entrepreneurship) relative to society’s unlimited needs and wants of

goods and services.

Allocative efficiency (to be continued)

Achieved when just the right amount of goods and services are produced from society’s

point of view so that scarce resources are allocated in the best possible way.

Resource allocation

Apportioning / distributing available resources or factors of production to particular uses

for production purposes by answering what to produce, for whom to produce, how to

produce.

Full employment

Situation when a country is producing at its potential level of real output. In the

production possibilities curve (PPC model), full employment exists when the economy is

producing on the PPC.

Sustainability

Refers to preserving the environment so that it can continue to satisfy needs and wants

into the future. Relates to the concept of “sustainable development”

Sustainable development

Refers to the degree to which the current generation is able to meet its needs today but

still conserve resources for the sake of future generations.

Opportunity cost

The value of the next best alternative which is given up when an economic decision is

made.

Production possibilities curve (PPC)

A diagram showing the maximum combinations of goods or services (or capital and

consumer goods) that can be produced by an economy in a given time period, if all the

resources in the economy are being used fully and efficiently assuming the state of

technology is fixed.

Potential output

Value of final goods and services produced in an economy when use of factors of

production is at full employment level of national income, or long-run equilibrium

according to the monetarist/new classical model.

Long-term growth

Growth over long periods of time. In the PPC model this is shown by outward shifts of the

PPC. It represents that over time, it is possible to produce a larger value of output due to

increases in potential output.

Growth in production possibilities

When the production possibilities of a country increase because of more/better resources

and/or better technology becoming available; illustrated by a shift outwards of the PPC.

Actual growth

Occurs when real output (real GDP) increases through time. In the PPC model it can be

illustrated by a movement from a point inside a PPC to another point in the northeast

direction.

Productive capacity

The greatest capability of an economy to produce, usually measured by the maximum

possible output of an economy as shown by the PPC.