Chapter 2

Production Possibility Curve (PPC/PPF)

a graphical representation of the maximum output society can produce given its resources
 Three questions every economic system must answer
1. What to produce  consumers
 Types of goods and services
2. How to produce  firms
 Mix of resources
 Type of technology
3. For whom to produce  “the price system”
 “distribution question”
 The price system doesn’t work when shortages occur
 Four assumptions
1. Two goods economy
 Only producing two goods
2. Full employment of resources
 Full employment = 5% unemployment rate
3. Quality and quantities of resources are fixed over a period of time*
 Ceteris paribus
4. Technology or production process is fixed over a period of time*
Example: An economy can only produce wheat and corn in accordance to the following
production possibility schedule/table.
Corn Wheat
0 50
10 40
20 30
40 10
50 0
60
 Scarcity
50 A
-10  Choices
Y
40 B  Opportunity cost
o Cost of next best choice
Corn

30 C
Z o From A to B, losing 10 tons corn
20 D  Max production
+10
10 E  Efficiency
 Attainable vs unattainable points of
0 F production
0 10 20 30 40 50 o Z is attainable, Y is unattainable
+10 -10
Wheat
  Constant opportunity cost
o Straight line PPC
o Ratio of opportunity costs is constant
o Resources for the production of wheat and corn are easily transferrable
 Increasing opportunity cost
o Concave down PPC
o Resources for the production of wheat to cars is not easily transferrable
Example:
Wheat Cars
10 0
9 1
7 2
4 3
0 4

4
A
B
3 C
D
2 E
F
G
1
H
I
0
0 2.5 5 7.5 10