Production Possibilities Curve Flashcards, test questions and answers

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What is Production Possibilities Curve?

The Production Possibilities Curve (PPC) is a graphical representation of the different combinations of goods and services that an economy can produce with its available resources. The PPC illustrates the opportunity cost associated with producing one good over another, as well as the concept of efficiency in resource allocation. In short, it shows how society must choose between two or more options when allocating resources for production.To illustrate the PPC, imagine a simple economy which only produces two goods wheat and automobiles. The PPC would show us how much of each good could be produced given a fixed amount of resources available in this economy. As more resources are devoted to producing one good, less will be available to produce the other; this is known as opportunity cost. For example, if resources were devoted entirely to producing wheat, no automobiles would be produced; however, if some resources were shifted away from wheat production towards automobile production instead then some cars could be made but there would be fewer bushels of wheat produced than before due to the opportunity cost incurred by investing in automobiles instead of wheat. The shape and slope of the PPC reflect economic principles such as increasing costs associated with producing more output (the law of diminishing returns), and allocative efficiency which occurs at points where either additional inputs will no longer result in increased output or where reallocating inputs from one industry to another will not increase overall output any further (the point at which society’s preferences are maximized). In conclusion, the Production Possibilities Curve is an important tool for understanding how societies make choices about resource allocation and trade-offs between different types of goods and services they can produce. It allows us to visualize what happens when we shift our focus away from one type of good towards another illustrating both opportunity costs associated with these decisions as well as economic principles such as diminishing returns and allocative efficiency.