Definition - shows the the maximum amount of good Y an economy is able to produce for each amount of X it chooses to produce if it fully and efficiently employs all of its scarce resources with its given level of technology.
Assumptions or ground rules of the PPC/PPF
- two goods or services only - clothing/food, butter/guns, capital goods/consumer goods
- Full employment - If your on the line there is full employment (B & C) below.
- Constant technology/resources/population/work force
What does it look like,
This represents a society that only produces two goods clothing and food. Obviously if they only produce food they will have no resources to produce clothing (bit awkward). If they only produce clothing they will starve. Society therefore must chose (make a trade-off) to produce some combination of the two goods.
If society is producing at point B (above) it's referred to as being attainable and efficient.
- Attainable - because by using all resources available and with full employment society can produce this amount of goods.
- Efficient - because it is impossible (with this combination of goods) to produce more of one good without decreasing the production of the other.
Example - 1995 AP Microeconomic Exam
In moving from point B to point C we have produced less of (units of good Y) and more of (units of good X) The question above asks,, what is the opportunity cost of moving from B to C.
- Opportunity Cost - The value of the next best alternative sacrificed. (what is given up)
Answer - In question 17, when moving from point B to point C, what is given up, is the amount of good Y from H to G of good Y. So (B) HG units of good Y is the answer.
Example 2 - 2000 AP Microeconomics Exam
OK, here we are using a table but the question is the same. What is the opportunity cost (what is given up) if society increases production of good Y from 0 to 200.
Answer - To produce 200 units of good Y we can only produce 980 units of good X,, so to move from 0 to 200 of good Y we must produce less of good X. We simply look across the table from 200 of good Y to the matching number of 980 units of good X. In increasing our production of good Y by 200 we have decreased our production of good X by 20, (1,000 - 980 = 20). So (D) 20 units of X is the final answer.
Example 3 - 2005 AP Microeconomics Exam
Again, the question is asking what is being given up (opportunity cost). If we are producing at point X of Capital Goods (50) then we are also producing 3 Consumer goods.
Answer - To move from producing 3 (point X) Consumer goods to 4 Consumer goods means that we must give up some Capital goods. It shows (dotted line) that at 4 Consumer goods we can only produce 30 Capital goods. So in moving from 3 units of Consumer goods to 4 Units of Consumer goods we move from 50 units to 30 units of Capital goods, we have given up 20 Capital goods.
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