PRODUCTION POSSIBILITY CURVE
• PPC/PPB/PPF defines the set of possible combinations of goods and
services a society can produce given the resources available.
Outside of PPC: unattainable
Inside of PPC: wasteful, inefficient/unemployment.
4 Key Assumptions
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus)
• Fixed Technology
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Production Possibility Schedule
Production Rice (in Cloth (in ‘000
Possibilities tons) meters)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Draw a Curve
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Three Types of Efficiency
Productive Efficiency:
• Products are being produced in the least costly way.
• This is any point ON the Production Possibilities Curve
Allocative Efficiency:
• The products being produced are the ones most desired by society.
• This optimal point on the PPC depends on the desires of society.
Pareto Efficiency:
• A situation when an economy has its resources and goods allocated to
the maximum level of efficiency, and no change can be made without
making someone worse off.
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Production Possibilities
4 Key Assumptions Revisited
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (4 Factors)
• Fixed Technology
What if there is a change?
3 Shifters of the PPC
1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade
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Production Possibilities
What happens if
there is an increase
in population?
Robots
Pizzas
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Production Possibilities
What happens if
there is an increase
in population?
Robots
Pizzas
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Production Possibilities
What if there is a
technology improvement
in pizza ovens
Robots
Pizzas
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Production Possibilities
What if there is a
technology improvement
in pizza ovens
Robots
Pizzas
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Capital Goods and Future Growth
Countries that produce more capital goods will have
more growth in the future.
Panama – Favors Mexico – Favors
Consumer Goods Capital Goods
Current
PPC Future
PPC
Capital Goods
Future
Capital Goods
PPC
Current
PPC
Consumer goods Consumer goods
Panama Mexico
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Concave PPC
Why?
1. Increasing Marginal Opportunity Cost
2. Imperfect Substitution
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Utility
⮚A relative measure of usefulness, pleasure and satisfaction a consumer
receives when he/she consume a product.
⮚Two basic kinds of utility:
– Total Utility: total satisfaction gained from consuming a certain quantity
of a product
– Marginal Utility: the extra utility gained from consuming one more unit
of a product
In the majority of cases, Marginal utility gained from extra units of a
product falls as consumption increases.
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Opportunity Cost
• Opportunity cost measures cost in terms of what must be given up in
exchange for something.
• It is the value of the next-best alternative when a decision is made;
it's what is given up in order to have something else .
• Example: In a shopping mall, the opportunity cost of a shirt is the
number of pants you would have to give up to buy the shirt.
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Constant vs. Increasing (Marginal) Opportunity Cost
Corn Car
Rice Pizza
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Calculating Opportunity Cost
Calculate the
Opportunity Cost of
going:
1. From A to B
2. From B to C
3. From C to D
4. From D to C
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