+

Production Possibilities CurveStudents will understand how PPC graphically illustrates: Opportunity Cost, trade-offs, efficiency, and growth

ES: C-5 Demonstrate understanding of concepts

+The Model

+Assumptions of the Model

These assumptions enforce ***CETERIS PARIBUS***1. “All things being equal”2. Allows us to isolate and analyze the relationship between 2

variables because all other variables are held constant

+Illustrates ALL Potential Trade-Offs

The United State’s production (of their simplified 2 good economy) capabilities are illustrated below

+ALONG (or on) the Curve

ANY point along the curve is feasible and fully utilizing ALL available resources (land, labor, capital)

+UNDER or BEYOND the Curve

UNDER the curve is attainable by the modeled economy—but not efficient. Unemployment, idle

resources*

BEYOND the curve is unattainable with current resources.

+Idle Resources*

So, being under the curve has no opportunity cost!

+Illustration of Opportunity Cost

The calculation:

+Illustration of Opportunity Cost II.

+Example:

Use the following PPC to calculate the opportunity cost of shirts.

+Constant Opportunity Cost

Curve is a straight line…constant slope.

+Increasing Opportunity Cost When the slope changes…negative increasing curves.

This implies that resources are not equally adaptable to all uses.

Example: Steel in Automobiles vs. Tanks curve

+Law of Increasing Opportunity Cost

The more an economy polarized production the greater greater cost, in terms of production, it will have to produce (opportunity costs are increasing = slope increasing!!!). Why the curve bows

An economy is giving up more of good 2 to produce more of good 1 This is because of the fact that resources are frequently

specialized

+Economic Growth Illustrated both in overall performance, or by sector.

Overall = both intercepts increase Sector = one variable of production increases, one intercept

increaseResult from new technology, improved labor, or more capital