Module The Production Possibilities Curve Model KRUGMAN'S MACROECONOMICS for AP* 3 Margaret Ray and David Anderson.

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Module The Production Possibilities Curve Model KRUGMAN'S MACROECONOMICS for AP* 3 Margaret Ray and David Anderson

What you will learn in this Module : The importance of trade-offs in economic analysis What the production possibilities curve model tells us about efficiency opportunity cost, and economic growth The two sources of economic growth - increases in the availability of resources and improvements in technology

The Production Possibilities Curve

Opportunity Cost - Constant

Opportunity Cost - Increasing

Economic Growth Economic growth means… Expansion of the economy’s production possibilities- it can produce more of everything Availability of resources (land, labor, capital, entrepreneurship) Technology

Economic Growth

Opportunity Cost and Marginal Analysis Decisions are based on changes in the status quo. When there is a change the decision is made at the MARGIN. Marginal : “the next one” or additional or incremental The question becomes- What are the additional benefits at the additional costs? Marginal Cost (MC): The additional cost incurred from consuming, producing, or trading of an additional (next) good and service. Marginal Benefit (MB): The additional benefit received from producing, consuming, or trading an additional good or service.

Let’s recap: What is efficiency? Productive efficiency: the economy is producing the maximum output for a given level of technology and resources. All points on the PPF are efficient Allocative efficiency: the economy is producing the optimal mix of goods and services. The combination of goods and services provides the most benefit to society.

HOW DO YOU CALCULATE THE OPPORTUNITY COST? e=related This is short video that explains how to calculate the opportunity cost.