4 - PPC & opportunity cost

what does a Production Possiblity Curve/Frontier show

• all combinations of products that can be produced using all available resources

• every point on the curve means all FOPs are being used (productive efficiency)

• what happens to production when resources are reallocated

opportunity cost

• value of the alternative forgone

• aka real cost

• opportunity cost increases as you move along the PPC

why is a PPC a curve and not a straight line

• certain workers/machinery are specialised in making one thing. They can’t be substituted perfectly

a point inside of the curve has __ opportunity cost

No

• because resources are abundant

a point outside the curve is _________

unatainable

• not possible to reach with current levels of FOPs

an outward/right shift represents ______

• economic growth

• increase in productive capacity

an outward/right shift is because of ______

• increase in FOPs/supply of labour (e.g. immigrants)

• improved training/skill development

• development of new capital (e.g. robots)

how does technology biased growth affect the PPC?

• less resources needed, easier to make certain products

• curve does not completely shift out, but stays rooted at 1 point while the rest of the curve shifts

free goods

• good with 0 opportunity cost (you don’t have to sacrifice anything)

• no substitutes (replacements)

• no complements (nothing to pair with it)

• e.g. rain, sunlight

economic goods

• any good with an opportunity cost in consumption

• have complements, scarcity, and substitutes