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Production Possibilities Curve

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Presentation on theme: "Production Possibilities Curve"— Presentation transcript:

1 Production Possibilities Curve
ES: C-5 Demonstrate understanding of concepts Students will understand how PPC graphically illustrates: Opportunity Cost, trade-offs, efficiency, and growth

2 The Model

3 Assumptions of the Model
These assumptions enforce ***CETERIS PARIBUS*** “All things being equal” Allows us to isolate and analyze the relationship between 2 variables because all other variables are held constant

4 Illustrates ALL Potential Trade-Offs
The United State’s production (of their simplified 2 good economy) capabilities are illustrated below

5 ALONG (or on) the Curve ANY point along the curve is feasible and fully utilizing ALL available resources (land, labor, capital)

6 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.

7 Idle Resources* So, being under the curve has no opportunity cost!

8 Illustration of Opportunity Cost
The calculation:

9 Illustration of Opportunity Cost II.

10 Example: Use the following PPC to calculate the opportunity cost of shirts.

11 Constant Opportunity Cost
Curve is a straight line…constant slope.

12 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

13 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

14 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

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