IB Economics/Introduction to Economics/PPF and PPC

Production Possibility Curves/Production Possibility Frontiers

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An illustration of trade offs facing an economy that produces only two goods

Draw diagrams showing opportunity cost, actual and potential output

Draw diagrams showing economic growth and actual output

Production Possibility Curves/Production Possibility Frontiers

• Points A and B on the PPF shows the maximum that can be produced with existing resources and technology, it is a point of productive efficiency
• The negative slope of the PPF reflects basic scarcity
• The law of diminishing returns implies a convex PPF: as resources are transferred from one use to another, the increment in output becomes smaller, the opportunity cost larger

• Resources are being released in the wrong combination
• The resources being released are less and less suited to the new use

• Area U inside the frontier is productively inefficient: more of one good could be produced without sacrificing any of the other:

• Under market systems it is called unemployment
• Under central planning it is called inefficiency

• Impossible points outside the PPF can only be reached through:

• Trade
• The discovery of more resources
• Increased labour productivity from greater education and training
• Increased capital productivity from an increase in technological knowledge