PPF typically represented by a curve graph
An economy operating on the PPF curve efficient (would be impossible increase production of one good without lowering production of another.
Below the curve = inefficent as resources could be relocated to produce more of both goods
Anything on or within the curve can be attained with current resources
Anything outside the curve cannot be attained with current reources.
Inside the curve, because not all resources are being used
On the curve. More of one good can be produced by sacrificing another
Production possibility changes based on bias of skills and resources
Resources may not be suited to producing the opportunity, therefore losing a higher potential
Resources are finite, not unlimited
By expanding the PPF a firm can produce more. Expand via improved technology, or by bringing on more labour for example
Opportunity cost is the highest value alternative which must be given up to engage in an activity
Changes in Op Cost
Increases in op costs
The Law of Increasing Opportunity Cost holds that the value of forgone production increases as the quantity of a good increases. The reason for this is resource variability. When all resources are used for one production some are well suited and others are not.
Decreases in op costs
In this case, opportunity cost actually decreases with greater production. While opportunity cost can decrease in limited circumstances, this is unlikely to happen for the economy as a whole.
The oportunity cost does not change with production, not realistic for whole economy but does happen sometimes.The economy forgoes the same amount of one good while producing more of the other
Simplifies economies into one or two goods. Makes it simple to graph. More can be worked out with advanced maths.
Assumes resources do not change.
Assumes the knowledge and information society has for these products is fixed
Assumes technical efficency, that is max production is being reached from inputs
The most important economic concepts illustrated using production possibilities analysis are
As more of one good is produced, less of the other goods is produced.
Producing on the PPC. All resources are engaged in production
Producing within the PPC. All resources *are not engaged in production
Indicated by an outward shift of the PPC.
Indicated by a tradeoff between the production of consumption goods and capital goods.
The slope of a line is measured by calculating the change in the value measured on the vertical axis divided by the change in the value measured on the horizontal axis.
Slope = Difference in Vertical (Rise) / Difference in Horizontal (Run)
Slope = Δ Rise / Δ Run