Production possibility curve/ Frontier

What is a production possibility curve/frontier

the combinations of goods and(or) services that can be produced with given resources and technology curve (PPC) is the boundary between those combinations of goods and services that can be produced and those that cannot It is a two goods case that is graphed

Assumptions:
Resources are fixed for the given period of time. Resources are fully employed Technology is given

Production efficiency
being able to produce more of one good only if less of another is produced. It means more of one good cannot be produced without producing less of another good. Points on the frontier utilize all the available resources and are efficient. Any point inside the frontier, such as point Z, is inefficient because at such a point it is possible to produce more of one good without producing less of the other good. At Z, resources are either unemployed or misallocated. If an economy is operating at a point inside the production possibilities frontier, then societys resources are being inefficiently utilized A society that is on its production possibilities frontier (PAP) is fully utilizing its productive resources.

Opportunity cost
The marginal cost (MC) of each good or service is the opportunity cost of producing one more unit of it Marginal cost (MC) is defined as the opportunity cost of producing another unit of a good or service. Opportunity cost can be illustrated by moving along a PPC unit by unit. MC shows that as more of a good is produced, opportunity costs of producing another unit increase

 In Figure moving along the PPC and produce more butter, (for example a move from C to D ) the opportunity cost of butter is the decrease in gun production from 12 units to 9 units, a decrease of 3 units, divided by the increase in butter production from 2 tons to 3 tons, an increase of 1 ton. So the opportunity cost is = 3 units of guns per ton of butter.

Cont

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Production possibility schedule

Combinati Butte Gun Opportunity Cost O.C of one Gun ons r s one ton of butter(in ((in terms of giving (ton) Unit terms of giving up up tons of butter) s units of gun) A B C D E 0 1 2 3 4 15 14 12 9 5 1 2 3 4 1 1/2 1/3 1/4

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Economic Growth
A. The expansion of production possibilities and increase in the standard of livingis called economic growth. To make our economy grow, we face a standard of living tradeoff B. The Cost of Economic Growth 1.Two key factors influence economic growth: a) technological change, which is the development of new goods and better ways of producing goods and services; and b) capital accumulation, which is the growth of capital resources, including human capital.