The PPC
Because resources are scarce,
economies cannot have an unlimited
output of goods and services. So, societies
must choose which goods and services
to produce. These choices can be
illustrated using a production
possibilities model; which illustrates the
maximum amounts of two goods that can be
produced assuming the full and efficient
use of available resources.
.
Four Assumptions for our PPC Model
.
1. Resources are fixed. There is no way to increase the
availability of land, labor, capital or entrepreneurship.
However, reallocation of these resources is possible.
2. All resources are fully employed. No unused land,
labor, capital, or entrepreneurship exists. The economy
is running at full production and producing goods
and services at the least cost (productive efficiency].
3. Technology is fixed. No new technological breakthroughs.
The PPC represents one specific time period.
4. Only two things can be produced (2-good model).
VS
The STRAIGHT LINE shows the two products are
“equally substitutable”, that is, they are not
specialized in particular uses, so the
opportunity costs will remain constant.
Constant Opportunity Cost
1 Corn = 1 Tomato
But in the real world resources are not completely adaptable
to alternative uses. Thus the PPC graph has a curve that
indicates a changing trade-off between resources. Obtaining
more of one good requires giving up larger amounts of the
alternative good.
The PPC is concaved outward due to the law of
increasing opportunity cost.
Notes...
LAW OF INCREASING
OPPORTUNITY COSTS
As the production of a
good increases, the
opportunity cost of
producing an additional
unit rises.
Capital (thousands)
This is the first of sixteen economic models you will be
expected to know, so let’s draw it now. You Y axis will be
labeled capital goods, and your X axis will be labeled
consumer goods. Don’t worry about the numbers right now.
Draw you curve making sure that it is bowed to the right.
12
11
10
9
8
7
6
5
4
3
2
1
1
2
3
Consumer
4
5
6
7
8
(hundred thousands)
This graph show the health of the economy as it is frozen in
time. The economy may change in the future; but remember
we will assume that things are fixed right now. The
relationship between a point on the graph and the curve
illustrates the health of the economy.
A
Capital Goods
B
C
E
D
Consumer Goods
Capital (thousands)
The curve represents the limit, or frontier, of economic
production (how much our economy can produce effectively).
Also called full employment, it represents about 96%
employment and 80% production capacity.
12
11
10
9
8
7
6
5
4
3
2
1
PPF or Full employment
1
2
3
Consumer
4
5
6
7
8
(hundred thousands)
Capital (thousands)
Our economy could be forced to achieve 100% production
output. And 100% of our labor force could be forced to work.
But this would over-extend the economy. Over-extended
economic production is illustrated by placing a point right
outside the curve (point A). The economy could give a little
bit more output but the cost is
12
too high, because the
11
10
economy will not be operating
9
at its best level.
8
7
6
5
4
3
2
1
A
PPF or Full employment
1
2
3
Consumer
4
5
6
7
8
(hundred thousands)
Points inside the curve represents economic inefficiency (point B). Resources are
not being fully utilized.
A point on the curve represents economic efficiency (point C & D). Resources are
being fully utilized.
Point movement along the curve represents your opportunity cost (moving from
point C to point D). The single optimal or best combination of output for any society
depends upon the preferences of society.
Points far outside the curve represents economically unattainable (point E). The
economy can’t produce there unless it grows.
E
Robots
C
*Shows opportunity cost
B
Inefficient
D
Bread
Unattainable
And How Is Economic Growth Demonstrated
on a Graph? Like This
Economic Growth
[Ability to produce a larger
total output over time]
Capital Goods
C
A
E
C
0
B
D
Consumer Goods
Factors that Cause Economic Growth;
Robots (thousands)
Q 14
Notes...
13
12
11
10
9
8
7
6
5
4
3
2
1
Economic Growth
1. Increase in resources -
2. Better resource quality -
More
of
either
or
3. Technological advances both is possible
1
2
3
4
5
6
7
8
Bread (hundred thousands)
Q
Factors that Cause Economic Growth;
These factors require Notes...
an investment in
Economic Growth
capital goods (they are 1. Increase in resources developments for
future economic
2. Better resource quality utility.)
More
of
either
or
3. Technological advances both is possible
So economies that produce a majority of capital
goods (goods for the future) will experience more
economic growth than the economy that produces a
majority of consumer goods (goods for the present.)
CURRENT
CURVE
FUTURE
CURVE
CONSUMPTION
Goods for the Present
FAVORING
FUTURE GOODS
Goods for the Future
Goods for the Future
FAVORING
PRESENT GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
Technological advance that is useful in
producing consumer goods but not capital
goods is shown below.
Goods for the Future
FAVORING
CONSUMER GOODS
CONSUMPTION
FUTURE
CURVE
CURRENT
CURVE
Goods for the Present
The End