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Production Possibilities Curve

Production Possibilities Curve. The PPC illustrates what is possible in terms of production with given resources and technology. Assumptions: Fixed endowment of economic resources Fixed technology Resources fully utilized. Digression on technology. Technology is “applied know how.”

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Production Possibilities Curve

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  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 75 125 160 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 75 100 125 160 Nondefense goods

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