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

The Model

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

Illustrates ALL Potential Trade-Offs The United State’s production (of their simplified 2 good economy) capabilities are illustrated below

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

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.

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

Illustration of Opportunity Cost The calculation:

Illustration of Opportunity Cost II.

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

Constant Opportunity Cost Curve is a straight line…constant slope.

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

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

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