Production Possibility Curves and Opportunity Cost Flashcards
Opportunity Cost
- The best alternative forgone
E.g. if you consume a Mars Bar, you must forgo a Crunchie. If Norm collects mangoes, he cannot collect sticks.
Production Possibilities Curve (PPC/PPF)
A curve showing the maximum output an economy can produce with full resource use and fixed technology.
Assume:
- That only two goods are produced in the economy i.e. good X and good Y
- All resources (in economy) are used (in the best alternative use).
- The resources and state of technology are fixed
Changes in the PPC
PPC curve pushed outward:
- Increase in technology
- Increase in the stock of resources
Point inside the PPC going to the curve:
- Increase efficiency
- Better utilization of resources
Why are PPCs curved?
Law of increasing costs (sometimes called the law of increasing opportunity costs).
As we allocate more resources to produce one good, the opportunity cost for each additional unit rises increasingly.
PPCs show Economic Growth
Each economy can produce XXX of good X and XXX of good Y –> Over time, the productive capabilities of this economy improve –> shift out the curve outward from A to B –> The economy can now produce XXXX of good X and XXXX of good Y.
The PPC can be used to show these key concepts
Scarcity
Choice
Efficiency
Which point is unattainable?
- A
- B
- C
- D
- E
- F
- G
G
Which points are attainable?
- A
- B
- C
- D
- E
- F
- G
A, B, C, D, E
Which point shows under utilization of resources?
- A
- B
- C
- D
- E
- F
- G
F
How to calculate opportunity costs?
What is Economics?
A social science that studies human behavior and choices in allocating scarce resources to satisfy wants.
Factors of Production
Land
Labor
Capital
Entrepreneurship
Normal Good
A good where the demand for it increases as income increases.
Inferior Good
A good where demand for it decrease as income increase
Constant Opportunity Cost diagram
Increasing Opportunity Cost diagram
Circular Flow of Income
