+
Production Possibilities
Curve
ES: C-5 Demonstrate
understanding of concepts
Students will understand how PPC
graphically illustrates: Opportunity
Cost, trade-offs, efficiency, and
growth
+
The Model
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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
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Illustrates ALL Potential Trade-Offs

The United State’s production (of their simplified 2 good
economy) capabilities are illustrated below
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ALONG (or on) the Curve

ANY point along the curve is feasible and fully utilizing ALL
available resources (land, labor, capital)
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
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.
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Idle Resources*
So, being under
the curve has no
opportunity cost!
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Illustration of Opportunity Cost
The calculation:
+ Illustration of Opportunity Cost II.
+
Example:

Use the following PPC to calculate the opportunity cost of
shirts.
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
Constant Opportunity Cost
Curve is a straight
line…constant slope.
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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
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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
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Economic Growth

Illustrated both in overall performance, or by sector.

Overall = both intercepts increase

Sector = one variable of production increases, one intercept
increase
Result from new
technology, improved
labor, or more capital