Production Possibility Curves and Opportunity Cost (Not Finished) 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)
The PPC shows the combination of two goods that can be produced using full employment of resources.
In this model, we 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).
Additional assumption mentioned in our textbook:
- The resources and state of technology are fixed
Changes in the PPC
The production possibility frontier may be pushed outward:
- Increase in technology
- Increase in the stock 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 which studies human behavior and the way in which we choose among the alternate uses of scarce resources to satisfy wants
Factors of Production
Land
Labor
Capital
Entrepreneurship
Normal Good
- As income increases, quantity demanded increase
- As price increases, quantity demanded decreases
Inferior Good
- As income increases, quantity demanded decreases
- As price increase, quantity demanded decreases
Constant Opportunity Cost diagram