PPC AP Micro

Production Possibilities Curve (PPC)

A model showing the alternative ways an economy can use its scarce resources to produce two goods.

Major concepts demonstrated by the PPC

Scarcity, opportunity cost, and efficiency.

Key assumptions of a PPC

Only two goods can be produced; Full employment of resources; Fixed resources; Fixed technology.

Point ON the PPC

Represents productive efficiency — resources are being used in the least costly way.

Point INSIDE the PPC

Represents inefficiency/unemployment — the economy could produce more with its existing resources.

Point OUTSIDE the PPC

Represents impossible/unattainable given the economy's current resources and technology.

Opportunity cost

The next-best alternative that is given up when making a choice.

Movement along the PPC

You produce more of one good but must give up some of the other good.

Per-unit opportunity cost

Calculated as Opportunity cost ÷ units gained.

Constant opportunity cost

Resources are easily adaptable to producing either good.

Shape of constant-OC PPC

A straight line.

Law of increasing opportunity cost

As you produce more of a good, the opportunity cost of producing additional units increases.

Reason for increasing opportunity cost

Resources are not easily adaptable to producing both goods.

Shape of increasing-OC PPC

Bowed outward (concave).

Productive efficiency

Producing goods in the least costly way; any point ON the PPC.

Allocative efficiency

Producing the combination of goods most desired by society.

Difference between productive and allocative efficiency

Productive efficiency focuses on whether we are producing efficiently, while allocative efficiency focuses on whether we are producing what society wants most.

Allocative efficiency at productive points

Not every productively efficient point is allocatively efficient; it depends on society's preferences.

PPC Shifters

The three major PPC shifters are change in resource quantity or quality, change in technology, and change in trade.

Effect of resource increase on PPC

The economy's production possibilities increase, causing the PPC to shift outward.

Effect of resource decrease on PPC

Production possibilities decrease, causing the PPC to shift inward.

Effect of technology improvement on PPC

Production possibilities increase, shifting the PPC outward.

Technology improvement affecting ONE good

The PPC shifts outward only on the axis of the good for which technology has improved.

Increase in population effect on PPC

Can increase the quantity of labor/resources, increasing production possibilities.

Effect of unemployment on PPC

Unemployment does not shift the PPC inward; it is represented by a point inside the existing PPC.

Change in demand effect on PPC

A change in demand does not shift the PPC; it changes the desired production combination, not the economy's productive capacity.

Economic growth

Caused by an increase in the economy's productive capacity, such as through more/better resources or improved technology.

Typical way to increase productive capacity

Increase capital stock.

Depreciation

The consumption of capital.

Importance of capital goods for future growth

Countries that produce more capital goods can have more growth in the future because capital helps increase future productive capacity.