Date post: | 23-Dec-2015 |
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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