Assumptions:

Fixed endowment of economic resources

Fixed technology

Resources fully utilized

The PPC illustrateswhat is possible in termsof production with given resources and technology

Technology is “applied know how.”

“A sharp knife is better than a dull knife.”

Specialization is the inevitable consequence of technology.

Combination DefenseGoods(Units)

NondefenseGoods(Units)

A 200 0

B 175 75

C 130 125

D 70 150

E 0 160

Nondefense goods

Def

ense

go

od

s

0 160

200

Feasible zone

A

F

C

B

U

I175

130

75 125

U is an inefficient point

I is an impossible point

Nondefense goods

Def

ense

goo

ds

0

PPC could shift right due to:

•Improved technology

•Population growth

•Improved education and training

•Discovery of new natural resources

•Growth of the capital stock

Nondefense goods

Def

ense

goo

ds

0

PPC could shift left due to:

•Depletion of nonrenewable resources.

•Destruction of the capital stock resulting from war or natural disaster.

•Failure to replace worn-out capital

•Deteriorating qualityof human resources

Combination

Defense Goods(Units)

MOC(per 25units of

non-defense goods gained)1

Non-defensegoods (Units)

A 200 - 0

B 195 5 25C 188 7 50D 175 13 75

E 155 20 100F 125 30 125

1MOC is defined as marginal opportunity cost.

Nondefense goods

Def

ense

go

od

s

0 160

200A

F

D175

125

75

E

100 125

155

Resources are specializedand hence not perfectlyadaptable to alternative

uses