What are the assumptions of the production possibility curve?
The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.
The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
- Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth.
- Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment.
- When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else.
A production possibilities curve PPC is an economic model that shows the production efficiency and allocation possibilities of the economy for a given level of resources. More specifically, it describes a society's trade-off between two goods or services or two types of goods and services.
- The case for economic literacy is a strong one. Nations benefit from having an economically literate population because it improves the public's ability to comprehend and evaluate critical issues. This understanding is especially important in democracies that rely on the active support and involvement of its citizens.
- Given that we have relative scarcity it gives rise to three basic economic questions faced by every economy.
- What to produce?
- This is concerned with how we allocate our scarce resources.
- How to produce?
- For whom to produce?
- For the economy as a whole, an improvement in technology shifts the production possibilities frontier outward. Production Possibility Frontier (PPF): An increase in technology that allows for greater output based upon the same inputs can be described as an outward shift of the PPF, as demonstrated in this figure.
In the field of macroeconomics, the production possibility frontier (PPF) represents the point at which a country's economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.
- It is because resources like labor or capital must be relocated to produce weapons. Most of the PPF curves are concave due to the inadaptability of the resources. The law of increasing opportunity cost states: as the production of one good rises, the opportunity cost of producing that good increases.
- In the field of macroeconomics, the production possibility frontier (PPF) represents the point at which a country's economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.
- If the PPF is a straight line as shown in the first graph, then the slope is constant. This means the opportunity cost is also constant. In real life, the PPF will not be linear, it will be a downward sloping curve because of the law of diminishing marginal returns. That's why PPC slopes downward.
Updated: 16th October 2019