Topic 1.3 Production Possibilities Curve

What is the Production Possibilities Curve (PPC)?

A model that shows alternative ways an economy can use its scarce resources, demonstrating scarcity, trade-offs, opportunity costs, and efficiency.

What are the 4 key assumptions of the PPC model?

1. Only two goods can be produced.

2. Full employment of resources.

3. Fixed resources (Ceteris Paribus).

4. Fixed technology.

How does the PPC demonstrate scarcity, trade-offs, and opportunity costs?

The PPC graphically shows the limits of production due to scarce resources, the trade-offs between different goods, and the opportunity cost of choosing one good over another.

What is the opportunity cost of moving from point A to B on the PPC?

The number of one good you must give up to produce more of another.

How does a straight-line PPC differ from a bowed-out PPC?

A straight-line PPC indicates constant opportunity cost because resources are easily adaptable for producing either good. A bowed-out PPC indicates increasing opportunity cost due to resources not being easily adaptable.

What causes the PPC to shift?

• Change in resource quantity or quality.

• Change in technology.

• Change in trade.

What happens to the PPC if there is an improvement in technology for producing one good?

The PPC will shift outward for that specific good, indicating that more of it can be produced with the same resources.

What is the significance of producing more capital goods compared to consumer goods?

Producing more capital goods leads to greater future growth, shifting the future PPC outward.

What happens on the PPC when there is unemployment?

Unemployment is represented by a point inside the curve, indicating underutilization of resources.

What is the difference between productive efficiency and allocative efficiency on the PPC?

Productive efficiency occurs at any point on the PPC, where goods are produced in the least costly way. Allocative efficiency depends on the desires of society, indicating the optimal point on the PPC.

How does an increase in education affect the PPC?

It improves the quality of the labor force, potentially shifting the PPC outward as more can be produced with better-educated workers.

What does a point outside the PPC represent?

It represents an unattainable level of production with current resources and technology.