Module 3
Jan 2015
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A Feasible but not efficient
B, C, and D Feasible and efficient in
production
X Not feasible
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Trade-off – when you give up something in
order to have something else. Ex: If you use
your resources to bake a cake, you cannot
use those same resources to make a pie.
Production possibilities curve – a model
economists use to understand an economy
that produces only two goods. It will answer
questions like “What is the maximum number
of cake you can bake if you also want to
make X number of pies?”
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An economy is efficient if there are no missed
opportunities.
Its true if it makes some people better off,
without making anyone worse off.
Inefficient – Not using all of your resources
efficiently.
Any point ON the PPC is efficient in production
Efficient in allocation means that everybody’s
needs are being met.
To be efficient, an economy must produce as
much of each good as it can, and it must produce
the mix of goods that people want to consume.
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What must be given up in order to obtain that
good.
If Susie can bake 10 cakes a day OR 6 pies a
day, then the OC to bake 1 cake is 6/10 or
3/5 of a pie.
What is the OC of making 1 pie?
Studying the PPC helps to capture that
information in a visual
Not all PPCs are straight lines (constant
slopes), some are bowed, like when there’s an
increase in the OC.
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A slope with a straight line is known as a
constant slope and the OC is known as a
constant opportunity cost.
The bowed slope is relative to an increasing
opportunity cost.
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Remember that it allows a sustained rise in
aggregate output.
It means an expansion of the economy’s
production possibilities.
An original PPC and a new PPC