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1.2 PPC SC

What is the PPC

  • PPC = Production Possibility Curve (frontier): the maximum output of two goods given existing resources and technology.
  • It represents the trade-off between two goods; the economy cannot produce beyond this frontier with current resources.

Shape and Opportunity Cost

  • The curve is bowed outward (concave to the origin), not linear.
  • This shape implies increasing opportunity cost: as you produce more of one good, you must give up progressively more of the other.
  • Expressed idea: ext{PPC is concave to the origin} and OCA \uparrow \text{ as } QA \uparrow (the opportunity cost of good A rises as more of A is produced).

Four Assumptions of the PPC

  • Two goods are produced (e.g., Good A and Good B); axis labeling is arbitrary.
  • Full employment of resources: all resources are used.
  • Productive efficiency: goods are produced at the lowest possible cost given resources.
  • Technology is up-to-date: the frontier reflects the maximum feasible production with current tech.

Points on, inside, and outside the curve

  • On the curve (e.g., points A, B, C): maximum feasible production given resources; productive efficiency.
  • Inside the curve (point D): inefficient use of resources (unemployment or underutilization).
  • Outside the curve (point E): unattainable with current resources; requires growth or trade to reach.
  • Comparative advantage and trade: if a country has the lower opportunity cost in one good, specialization and trade can allow more of both goods and effectively shift attainable production outward.

Shifting out the PPC (economic growth)

  • Outward shift indicates economic growth; use arrows to show movement to the right.
  • Ways to shift out the PPC:
    • Trade and specialization based on comparative advantage.
    • Discovering or adopting new resources (e.g., new inputs, energy reserves).
    • Population growth or migration increases the labor force.
    • New technology that improves production across all goods.
    • Invest in capital goods: more capital goods expands future production capacity; if you relabel the axes, you can think of Good A as capital and Good B as consumer goods.
  • Investment in capital goods can enable more of both capital and consumer goods in the future.