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.