![]() Nevertheless, examining these tradeoffs leads to significant insights about different facets of the economy. In reality, there are many goods in most economies, and the complexity of the economy as a whole cannot be reduced to the impact of simple tradeoffs. PPCs are intentionally simplified illustrations of what happens when one good is produced instead of another. It is important to note, however, that PPCs are used only to give us a hypothetical understanding of these economic conditions. We can graph the tradeoff between any two goods using the PPC. We can devise a PPC that will show us the amount by which computer production will decrease as car production decreases, and vice versa. The production possibilities curve is a visual aid allowing us to understand scarcity, choice, and opportunity cost. The unproduced computers represent the opportunity costs imposed on society by choosing cars. An increase in car production may mean a decrease in computer production. Similarly, when society chooses to allocate its land, labor, and capital to the production of one type of good (cars, for example), it gives up other possible uses of those resources (the production of computers, for example). You also pay the price of foregoing other enjoyments, such as a hamburger and soda. If you buy a movie ticket for $10, the cost to you is not strictly monetary. Instead of well-being or profit, an economy’s goal, in the eyes of economists, is efficiency.Īny time we as individuals, businesses, or a society choose one way of allocating resources over another, we pay what are called opportunity costs. An economic system takes limited quantities of resources and assigns them to certain uses as opposed to other uses. The company must make choices based on its limited pool of resources, and it will allocate its resources in a way that will bring the maximum amount of profit. A car company is limited in the number and variety of cars it can produce by the amount of land, labor, and capital (equipment and money for doing business) in its possession. A business, likewise, is faced with limited resources. He may allocate part of that sum to rent, part to a car payment, part to groceries, and part to entertainment, allocating different amounts of money to different uses in an attempt to create maximum well-being. Someone with a weekly salary of $500 understands that the quantity of purchases he can make with that amount of money is limited. Most of us probably see scarcity at work in our daily lives. The fundamental quality dictating the economy is scarcity: the resources that we as a society draw on to produce goods and services are limited. In economics the production possibilities curve (PPC), also called the production possibilities frontier (PPF), is a tool for illustrating the idea of trade-off by showing the maximum quantities of two goods that can be produced at a given time from an existing, finite pool of resources. The curve does not shift.Production Possibilities Curve What It Means Unlike an expansion of resources and technical progress, technical efficiency change moves an economy from a point inside the production possibilities curve to a point on the curve. Technical efficiency change, a change from the use of less than the best to the best technology, results in an increase in output.Ī. Technical progress, an improvement in the best technology that allows more output to be produced with a given amount of resources, will result in economic growth.ģ. Economic growth, a rightward shift in the production possibilities curve, willĢ. Resource Accumulation, Technical Progress, and Technical Efficiency Changeġ. In order to achieve the best combination, the economy should produce at the point where marginal benefit and marginal cost are equal.Ĭ. The best combination of goods and services is the combination which satisfies wants as fully as possible.Ģ. The Best Combination of Goods and Servicesġ. To produce a given combination of goods and services.ī. The best technology is the technology that requires the fewest resources A production possibilities curve shows the maximum combinations of two goods and services that an economy can produce when resources are fully used and the best technology is applied.Ī. ![]() Capital is the man-made, durable items used in the production process.Ģ. Labor is all physical and mental abilities used by people in the production process.ģ. Land, labor, and capital are the three primary resources.Ģ. The economy uses resources to produce goods and services.Ī. Production Possibilities for the Economyġ. PRODUCTION POSSIBILITIES AND ECONOMIC GROWTHĪ.
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