Opportunity cost: the next best alternative that is given up when making a decision.
Production Possibility Curve(PPC): represents all possible combinations of the maximum amounts of two goods that can be produced by an economy, given its resources and technology, when there is full employment of resources and productive efficiency. All points on the curve are known as production possibilities.
Production Possibility Curve(PPC)
Point B and C lie on the PPC, and they can only exist when:
all resources are fully employed.
all resources are used efficiently.
Point lies inside the PPC, and this is because the resources are not fully employed and/or being used efficiently.
Point D is outside the PPC and is unattainable, because:
scarcity exists: the economy only has limited amount of resources and there is an opportunitycost involved in any decision to produce any good, so producing outside the PPC is impossible.
Shifts in PPC:
If there is an increase in resources in an economy or an increase in efficiency of resources, the PPC shifts outward.
Conversely, if resources are depleted or inefficiency arises in the economy, the PPC shiftsinward.
NOTE: Any change in the employmentofexistingresources does not shift the PPC, it just moves the point inward or toward the PPC.
PPC and increasing opportunity cost
As you move along the PPC, the opportunity cost of producing a good increases.
This is because the factors of production used in producing both goods are not interchangeble and cannot be used to produce both goods. This is called specialisation of factors of production, which prevents the factors of production from being fully interchangeable.
Therefore, for producing eachadditionalunit of good A, more units of Good B need to be given up, as factors of production used for producing Good B will be less suited or less specialised in producing Good A.
This results in a PPC that is concave.
PPC and constant opportunity cost
Conversely, if the factors of production used in producing both goods are completely interchangeable, the opportunity cost stays constant. This means that for producing each additional unit of good A, the same amount of units of good B need to be given up.
This means that the factors of production used for producing both goods are equally specialised in producing both.