AP Micro1.3 Oppurtunity cost and the Production Possibilities Curve

PRODUCTION POSSIBILITIES CURVE
If producing two items, increasing production of one will decrease production of the other.
Production Possibilities Frontier: Shows the highest possible outcomes for producing two products based on time spent on each one (e.g. if you spend all your time hunting rabbits, you have no berries and vice versa).
All points outside of PPF are impossible, but any points inside are possible, just less optimal.
OPPORTUNITY COST
“What am I giving up in terms of resource A to gain more of resource B” (If I spend all my time gathering berries, but I want +1 rabbit, how many berries does it cost me in pursuit of the rabbit?)
Oppurtunity cost changes for each scenario—not necessarily constant between scenarios
Marginal Costs: What is the oppurtunity cost of producing ONE more unit? Always in units of one.
INCREASING OPPORTUNITY COST
As we pursue more of one resource, the oppurtunity cost of the other becomes higher and higher (Not always the case, but common)
Reason: In order to pursue one resource disproportionately, it generally takes more effort. If pursuing in a roughly 50:50 split, you will find low hanging fruit from each, but if you pursue say 90:10, you’re going to have to leave some low hanging fruit on the 10 side and pursue the harder to gain resources on the 90 side. (Similar to point of diminishing returns)
PPCs FOR INCREASING, DECREASING, AND COSNTANT OPPURTUNITY COST
Constant(linear): You can choose whatever you need becuase the tradeoff, or opportunity cost is the same for each increment.
Increasing(looks convex): Generally you want to stay somewhere in the middle of the graph because as you near the ends, you give up a significant amount of one resource
Decreasing(Looks concave): Generally you’d wanna be toward the end of the graph you want more resources in. The middle is the most balance but least optimal in terms of total production.
PRODUCTION POSSIBILLITIES CURVE AS A MODEL OF COUNTRY’SS ECONOMY
PPC Growth: The radius of your curve expands due to more land, capital, labor, or better technology
Simply going from inefficieny to efficiency does not mean growth; the entire PPC must grow for it to be considered growth.
PPC Contraction: The radius of your curve shrinks due to less land, capital, labor, or worse technology
Simply going from efficieny to inefficiency does not mean growth; the entire PPC must shrink for it to be considered contraction.
EXTRA NOTES
Points outside of PPC are impossible
Points inside of PPC Are inefficient
Points on PPC are efficient
Opportunity cost of each unit of good X=(Y1-Y2)/(X1-X2) units of good Y

How would you show with a PPC that a country has constant opportunity costs of production?

Calculate the opportunity cost of each significant point the particular range, then calculate the delta—if the slope is constant, the opportunity cost is constant

Using a correctly labeled PPC model, show an economy that has increasing opportunity costs that can produce cattle prods and chocolate donuts that is underutilizing its labor.

FLASHCARDS

production possibilities curve (PPC)	(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.
opportunity cost	the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.
efficiency	the full employment of resources in production; efficient combinations of output will always be on the PPC.
inefficient use (under-utilization) of resources	the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.
growth	an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.
contraction	a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.
constant opportunity costs	when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.
increasing opportunity costs	when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up \[2\] fidget spinners when she produces the first Pokemon card, and \[4\] fidget spinners for the second Pokemon card, so she has increasing opportunity costs.
productivity	(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.