ECON261 Exam 1 Study Guide Chapter 2: Production Possibility Curve (PPC)

What is opportunity cost?

The value of the next best alternative that must be given up when making a choice.

What does the Production Possibility Curve (PPC) represent?

A graphical representation of the maximum combinations of two goods that can be produced given fixed resources.

What are the assumptions made in the PPC model?

Resources are fixed, technology is constant, and production occurs efficiently.

What do we mean by economic efficiency? Inefficiency?

1. Economic efficiency: Resources are allocated in a way that maximizes output.

2. Inefficiency: Resources are not being used to their full potential.

How is opportunity cost measured along a PPC?

By the slope of the PPC, which indicates how much of one good must be sacrificed to produce more of another.

Why does opportunity cost increase as the economy produces more of the other good?

Because resources are not perfectly adaptable; as you switch production, you give up increasingly more of one good for the other.

What do we mean by allocative efficiency?

Resources are distributed in a way that maximizes consumer satisfaction.

How is economic growth or decay depicted on the PPC?

Economic growth shifts the PPC outward; decay shifts it inward.