Production Possibilities Curve

Production of Possibilities Curve

maximum combinations of how different goods can be produced

Production Possiblities Curve

Increasing opportunity: this economy produces more and more corn, the opportunity costs in terms of robot production increases due to imperfectly adaptable resources

Graph 4: linear production possiblities curve

all productive possibilities curve

Graph 5 : points on the curve are inefficient

long-run equilibrium meaning that all resources are being used to their maximum potential

Graph 6: points on the curve are inefficient meaning indication of resources not being used to their maximum potential

Graph 8: points on the curve are impossible due to scarcity

Outward shift of the production possibilities curve

comes from an increase quality and quantity of resources.

It is economic growth when increase in long run potential real GDP

Inward shift

1. decrease in quality or quantity of resources

2. no longer be possible to produce as much as corn/robots in this economy

Opportunity cost

most desirable alternative given up when you make a choice

Factors of Production

land,labor,capital

Absolute advantage

the producer that can produce the most output or requires the least amount of inputs

Comparative advantage

the producer with the lowest opportuntiy cost

Countries should trade if they have a relatively lower opportunity cost

they should specialize in the good that is cheaper for them to produce

Formula: quantity of Good A for Country x/Quantity of Good B for Country x

Terms of tRADE

Both countries can benefit from trade if they each have relatively lower opportunity costs. The agreed upon conditions that would benefit both countries.

Ex. trade 1 ton of weight for 1.5 tons of sugar

circular flow model

an economic model that shows how money, resources, and products move through an economy. The model is also known as the circular flow of income model because the flow of money between sectors is used to measure a country's GDP or national income. 

In a simplified circular flow model, there are two economic actors: households and businesses. Money flows from businesses to households in the form of wages and goods and services, and then back to businesses as payment for products. More detailed models include the government, banking systems, and foreign markets. 

private sector

part of the economy that is run by individuals and businesses

public sector

part of the economy that is controlled by the government

factor payments

payment for the factors of production, namely rent, wages, interest, and profit

transfer payments

when the government redistributes income