A PPC is a curve that joins together the different maximum combinations of products that can be produced in an economy over a particular period of time given the existing resources and level of technology – using all available factor resources efficiently (fully employed).
It is usually drawn concave to the origin because as more resources are allocated towards Good Y the extra output gets smaller- so more of Good X has to be given up in order to produce Good Y. This represents increasing opportunity costs.
Increasing opportunity costs occurs when the extra production of one good involves ever increasing sacrifices of another.
It also represents the Law of Diminishing Returns and it occurs because not all factor inputs are equally suited to producing items leading to lower productivity and increasing opportunity costs.
PPC and economic efficiency
- Combinations of Good X and Y that lie inside the PPC (example point C) happen when there are unemployed resources or when resources are used inefficiently.Output could increase if the PPC moves towards points A & B – the maximum productive potential.
- Point D is unattainable but desirable as the economy would require an increase in factor resources, increase in productivity or an improvement in technology.
- Producing more of both goods would mean that an improvement in economic welfare and allocative efficiency.
A straight line PPC shows constant opportunity costs indicating an equal sacrifice of resources.
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