CHAPTER 2 : PRODUCTION POSSIBILITY CURVE

NOTES

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PRODUCTION
POSSIBLITY CURVE2
CHAPTER

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2.CHOICES
When scarcity exists, choices are to be
made.
3.OPPORTUNITY COST
Opportunity cost is defined as the second
best alternativethat has to be foregone for
another choice which gives more
satisfaction.
4MICROECONOMICS
BASIC ECONOMIC CONCEPTS
(CON’T)

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It is used to explain the basic economic
concepts of scarcity, choices and opportunity
cost.
DEFINITION
The PPC shows various possible combinationof
goods and services produced within a specified
time with its resources fully and efficiently
employed.
PRODUCTION POSSIBILITIES
CURVE (PPC)

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1.Economy is in full employment and
full production capacity (full
efficiency).
2.Resources available are fixed and
limited.
ASSUMPTIONS OF
PRODUCTION POSSIBILITIES
CURVE (PPC)

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THE ASSUMPTIONS OF
PRODUCTION POSSIBILITIES
CURVE (PPC) (CON’T)
3.The state of technology does not
change throughout production.
4.It is assumed that the country is
only producing two goods.

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TYPES OF PPC
INCREASING OPPURTUNITY COST
OPPURTUNITY COST

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Good Y
Good X
Increasing
Opportunity Cost
4
2
1
3
5
0
1 2 3
6
A
B
C
D
CONCAVE SHAPE OF PPC
CURVE

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TYPES OF PPC
DECREASING OPPURTUNITY COST
OPPURTUNITY COST

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Good Y
Good X
Decreasing
Opportunity Cost
1 2 3
4
2
1
3
5
0
6A
B
C
D
CONVEX SHAPE OF PPC CURVE
(CON’T)

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TYPES OF PPC
CONSTANT OPPURTUNITY COST
OPPURTUNITY COST

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13MICROECONOMICS
Good Y
Good X
Constant Opportunity
Cost
4
2
1
3
5
0
1 2 3
6
A
B
C
D
LINEAR SHAPE OF PPC CURVE
(CON’T)

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Consumer Goods (million)
Defence Goods (million)
PRODUCTION POSSIBILITIES
CURVE (PPC) (CON’T)
North Korea
produces two
products—defence
goods and
consumer goods
If North Korea is at point C on the
PPC, it can produce the combination
of 120 million defence goods and
20 million units of consumer goods
Point D shows production of 90
million defence goods and 30
million units of consumer goods
D
C
B
E
If it allocates its resources to
defence goods, it will produce at
Point A
If it allocates its resources to
consumer goods, it will produce at
Point F
A
F
40 50
0
10 20 30
90
60
120
150
30

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Point along the PPC 
CHOICES
Point outside the PPC
(Point Z) SCARCITY
UNATTAINABLE
PRODUCTION POSSIBILITIES
CURVE (PPC) (CON’T)
Movement from one point
to another (point C to D)
OPPORTUNITY COST
Defence Goods (million)
Consumer Goods (million)
F
Z
D
C
A
B
E
120
40
60
50
30
90
150
0
10 20 30
Y
ATTAINABLE
Point inside the PPC (Point
Y) Waste of resources
and inefficiency

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Defence Goods (million)
Consumer Goods (million)
When the country enjoys
economic growth, the
PPC moves outward
120
40
60
50
30
90
150
160
0
10 20 30
SHIFTS OF PPC DUE TO
ECONOMIC GROWTH
When the country
is struck by natural
disaster, economic
growth will decline
and PPC shifts to
the left

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Consumer Goods (million)
Defence Goods (million)
Technology increases
production of defence
goods
Technology increases
the production of
consumer goods
40 5010 20 30
120
60
30
90
150
160
0
17MICROECONOMICS
SHIFTS OF PPC DUE TO
IMPROVEMENT IN TECNOLOGY

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Defence Goods (million)
Consumer Goods (million)
40 50
120
60
30
90
150
160
0
10 20 30
Decrease in
Population
Increase in population
SHIFTS OF PPC DUE TO
POPULATION

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FUNDAMENTAL ECONOMIC
QUESTIONS
1.WHAT TO PRODUCE ?
Depends on the what type of goods and
servicesto produce.
2HOW TO PRODUCE ?
Depends on the cheapest method of production.
3. FOR WHOM TO PRODUCE ?
Depends on the distribution of income

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