Production Possibilities Curve

1
Production Possibilities Curve
The PPC illustrateswhat is possible in termsof
production with given resources and technology

• Assumptions
• Fixed endowment of economic resources
• Fixed technology
• Resources fully utilized

2
Digression on technology

• Technology is applied know how.
• A sharp knife is better than a dull knife.
• Specialization is the inevitable consequence of
  technology.

3
A hypothetical economy
4
Feasible zone
The PPC

• U is an inefficient point
• I is an impossible point

A
200
B
I
175
C
130
Defense goods
U
F
0
160
75
125
Nondefense goods
5
Shifts of the PPC

• PPC could shift right due to
• Improved technology
• Population growth
• Improved education and training
• Discovery of new natural resources
• Growth of the capital stock

Defense goods
0
Nondefense goods
6
Shifts of the PPC, part II

• PPC could shift left due to
• Depletion of nonrenewable resources.
• Destruction of the capital stock resulting from
  war or natural disaster.
• Failure to replace worn-out capital
• Deteriorating qualityof human resources

Defense goods
0
Nondefense goods
7
Why is the PPC bow-shaped?
1MOC is defined as marginal opportunity cost.
8
The Law of Increasing Opportunity Cost
Resources are specializedand hence not
perfectlyadaptable to alternative uses
A
D
200
E
175
155
F
125
Defense goods
0
160
75
100
125
Nondefense goods