PPC (PRODUCTION POSSIBILITY CURVE), Summaries of Economics Concepts for Engineers

Download PPC (PRODUCTION POSSIBILITY CURVE) and more Summaries Economics Concepts for Engineers in PDF only on Docsity!

The Production Possibility Curve (PPC)

A PPC shows all the combinations of two

‘goods’ which can be provided if all

resources are being used efficiently

The Production Possibility Curve (PPC)

Kidney Cancer Treatment

Other health care services

PPC

KC

HC

USE 1. Showing Choices This PPC shows all the combinations of Kidney Cancer Treatments and other health care services available in the economy. The NHS can provide KC kidney care treatments and no other services, HC other services and no kidney treatment or any of the combinations in between such as A where HCA health care services and KCA kidney treatments are provided.

HCA

A

KCA

Capital Goods

Consumer Goods

Yo

Xo

A

Y1 B

X

Assume a country

can produce two

types of goods

with its resources

• capital goods

and consumer

goods

If it devotes all resources to capital goods it could produce a maximum of Ym. If it devotes all its resources to consumer goods it could produce a maximum of Xm

Ym

Xm

If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods

If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra X1-X0consumer goods is Y 0 – Y1 capital goods.

Productive efficiency

• The PPF is drawn on the assumption that all

resources are fully and efficiently employed

• Therefore:

• any point on the PPF shows efficient production (Productive Efficiency)
• any point inside the PPF shows inefficient production or unemployed resources
• any point outside the PPF is currently unobtainable

Can illustrate ECONOMIC GROWTH

The economy cannot produce at Y or anywhere outside the PPC as the PPC shows the Y Maximum Capacity of a country

An economy might be able to move its PPF in the future if there is economic growth, this means there is an increase in production potential

Consumer Goods

Capital Goods

Economic Growth increases the productive

potential of the economy:

An economy can grow if it increases the quantity

or quality of its factors of production.

e.g. A new technological development results in

an increase in productive potential and the

curve can move outwards.

Curved PPCs

Agricultural Output

Manufacturing Output PPF

When the PPC is curved, you can see from the diagram that in attempting to gain equal amounts of addition units of manufacturing output , the economy is having to sacrifice increasing amounts of agricultural output. Why would this be the case?

A

B

C

Curved PPCs

The Opportunity cost of producing more manufactured

goods is increasing as we give up increasing amounts

of agricultural products to achieve it.

The reason is that different factors of production have

different properties or skills and as we concentrate

more and more on the production of one thing we

have to start using resources that are less and less

suitable for it.