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**Production Possibilities Curve**

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

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The Model

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**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

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**Illustrates ALL Potential Trade-Offs**

The United State’s production (of their simplified 2 good economy) capabilities are illustrated below

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

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**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.

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

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**Illustration of Opportunity Cost**

The calculation:

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**Illustration of Opportunity Cost II.**

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

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**Constant Opportunity Cost**

Curve is a straight line…constant slope.

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**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

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**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

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**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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