1.2 Opportunity Cost and the Production Possibilities Curve (PPC)

Essential Question:

What is the purpose of the production possibilities curve?

Learning Objectives

MOD-1.B
- A. Define (using graphs as appropriate) the PPC and related terms
- B. Explain (using graphs as appropriate) how the PPC illustrates opportunity costs, tradeoffs, inefficiency, efficiency, and economic growth or contraction under various conditions
- C. Calculate (using data from PPCs or tables as appropriate) opportunity cost.

Essential Knowledge

MOD-1.B
- 1. PPC is a model used to show the tradeoffs associated with allocating resources
- 2. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, underutilized resources, and economic growth or contraction
- 3. The shape of the PPC depends on whether opportunity costs are constant, increasing, or decreasing
- 4. The PPC can shift because of changes in factors of production as well as changes in productivity / technology
- 5. Economic growth results in an outward shift of the PPC

If all of society's resources are being fully utilized, production in one area can be increased only by decreasing production in another.

The same thing can be said for businesses. If a shopping mall is built on land that had previously been farmland, that land can no longer be used to raise food. Workers building a sports complex cannot be employed at the same time building a hospital. Equipment needed to produce SUVs and pickup trucks can produce more SUBs only by taking some of the machines away from the production of pickups, resulting in fewer pickups.

Since individuals and institutions are unable to have everything thye want, it is necessary for them to choose between those goods and services they will either purchase or produce and those they will forgo. In analyzing how people make their choices, economists speak of trade-offs and opportunity costs.

Making Economic Choices

The many segments of society - individuals, businesses, government- make decisions about how to use available resources to produce the quanitity and quality of goods and services that consumers desire. How well a society provides what consumers want reflects its economic efficiency- or inefficiency.

The Production Possibilities Curve (PPC)

Scarcity forces individuals and societies to choose among the things they want. If they choose one combination of goods and services, they must give up another. To illustrate the concept of scarcity, economics use a model based on these assumptions:

Society produces only two types of goods, and is using all of its resources
The society is using all available resources efficiently (in other words, it is using all available natural resources and capital, and the labor force is fully employed.)
The society is using the best available technology and working as efficiently as possible.

Production Possibilities Example

Uses of the PPC

The production possibilities curve is very versatile in application. It can be used to determine possible outcomes of additional resources, such as the expansion of the labor force, better management techniques, or improved technology. Any or all of these resources could potentially allow workers to produce goods more efficiently. In other words, economic growth occurs through an increase in the quantity of quality of resources.

There are three main drivers of growth:

Introduction of new technology
Increase of the labor force
Discovery or exploitation of a new resource

Effects of Change on the PPC

Vocabulary

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