1.3: The Production Possibilities Curve and Cost-Benefit Analysis

Using Economic Models

• Step 1: Explain Concept In Words

• Step 2: Use Numbers As Examples

• Step 3: Generate Graphs From Numbers

• Step 4: Make Generalizations Using Graph

What Is The Production Possibilities Curve?

• production Possibilities Curve (frontier, PPC): A Model That Shows Alternative Ways That An Economy Can Use Its Scarce Resources

  • Graphically Demonstrates Scarcity, Trade-offs, Opportunity Costs, And Efficiency

4 Key Assumptions

1. Only Two Goods Can Be Produced

2. Full Employment Of Resources

3. Fixed Resources (ceteris Paribus) — 4 Factors

4. Fixed Technology

Production Possibilities

• Constant Opportunity Cost: Resources Are Easily Adaptable For Producing Either Good

  • Result Is A Straight Line Ppc (not Common)

• Law Of Increasing Opportunity Cost: As You Produce More Of Any Good, The Opportunity Cost (forgone Production Of Another Good) Will Increase

  • Occurs Because Resources Are Not Easily Adaptable For Producing Both Goods

Shifting The Production Possibilities Curve

3 Shifters Of The PPC

1. Change In Resource Quantity Or Quality

2. Change In Technology

3. Change In Trade (allows More Consumption)

Shifting The PPC

• Refer To Shifts As “left/right”

• More Resources → Higher Production → Shift To The Right

• Favoring Capital Goods Increases Consumer Goods (investment)

• Just “demand”: Movement Along Line (doesn’t Shift Curve Itself)

• Decrease In Workers: Inefficient (point Inside Of Line)