Production Possibilities Curve

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The Production Possibilities Curve

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Presentation transcript:

Production Possibilities Curve The PPC illustrates what is possible in terms of production with given resources and technology Assumptions: Fixed endowment of economic resources Fixed technology Resources fully utilized

Digression on technology Technology is “applied know how.” “A sharp knife is better than a dull knife.” Specialization is the inevitable consequence of technology.

A hypothetical economy

The PPC Feasible zone U is an inefficient point I is an impossible point A 200 B I 175 C 130 Defense goods U F 75 125 160 Nondefense goods

Shifts of the PPC Defense goods Nondefense goods PPC could shift right due to: Improved technology Population growth Improved education and training Discovery of new natural resources Growth of the capital stock Defense goods Nondefense goods

Shifts of the PPC, part II PPC could shift left due to: Depletion of nonrenewable resources. Destruction of the capital stock resulting from war or natural disaster. Failure to replace worn-out capital Deteriorating quality of human resources Defense goods Nondefense goods

Why is the PPC bow-shaped? 1MOC is defined as marginal opportunity cost.

The Law of Increasing Opportunity Cost Resources are specialized and hence not perfectly adaptable to alternative uses A D 200 E 175 155 F 125 Defense goods 75 100 125 160 Nondefense goods