Production Possibility Curve / Frontier Model that shows the maximum production possibilities with given resources and technology Assumptions behind the model Two goods only can be shown on the curve Resources are fixed at one point in time Technology is unchanging at one point in time Productivity of all resources is constant All resources are used as efficiently as possible with the existing level of knowledge.

Basics Consumer goods – goods that satisfy our wants and needs now. Current consumption Capital goods – man made goods used to improve production PPC shows the concepts of scarcity, choice and opportunity cost. Shapes of PPC can be different depending on the resources and their uses.

Terms and placement on PPC Scarcity – a position beyond the PPC that can not be produced due to a lack of resources to reach it. Choice – where two positions are considered to produce the two goods but a gain in production results for one option and an opportunity cost results for the other option. Opportunity cost – alternative forgone when a choice is made.

PPC Consumer goods Capital goods Point Opportunity cost Gain 60 A - 10 40 B 20 C 30 D When moving from point A to B an opportunity cost exists e.g. 20 capital goods are given up so that 10 consumer goods can be produced. The economy puts resources into two goods only but at the extreme ends only one good is produced on the PPC until the economy moves from point to point.

Straight PPC Production possibility curves are straight when the opportunity cost is constant e.g. they do not change. The cost of switching between good A and Good B is constant as the resources are interchangeable. E.g. pies and sausage rolls use the same resources so would create a straight PPC

Graphing PPC – using a even scale, and only two goods based on production possibilities for both goods Production data A B C D E F Good A 100 80 60 40 20 Good B 120 160 220 Opportunity cost is what is given up as production moves from one point to the other e.g. point A to B is 20, B to C is 20 so this PPC will be straight. Gain is what is beneficial to production from the change e.g. A to B is 40.

Bowed out shape - PPC Production possibility curves are bowed out when the opportunity cost is increasing e.g. it gets larger the further along the curve you move. The cost of switching between good A and Good B is increasing as the resources are not interchangeable and costs are increasing. E.g. making cars and food use totally different resources resulting in increasing costs