AP ECONOMICS

Opportunity Cost and the Production Possibilities Curve

Trade-off (Scarcity)

An alternative that we sacrifice when we make a decision

A student skips school to go to ACL. Trade-off is giving up school for the concert

Guns or Butter: A cliché that refers to the trade-offs that nations face when choosing whether to produce more or less military or consumer goods

Opportunity cost

The next best alternative given up as the result of a decision

Going back to the ACL example...› Grades have suffered due to skipping

school› Decisions have a consequence or “cost”

Why must the opportunity cost of a decision always be something desirable?

An opportunity cost must be desirable because there would be no meaningful decision to be made between a desirable option and an undesirable.

What does it mean to “think at the margin”?

“Thinking at the margin” means making a decision about how much more or less to do. It allows people to evaluate options based on available resources.

Thinking at the margin

To think about your next step forward› “Marginal” means “additional”

The first glass of cold water on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next additional action means for you.› Should I have another glass of water?› Is the benefit of one more unit greater than its cost?

Production Possibilities Curve A curve depicting all maximum output possibilities for two

or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.

Shows all the goods and services that an economy is capable of producing given the factors of production available.

Production Possibilities Curve

Illustrates scarcity, choices & opportunity costs

Points on the curve show production amounts possible for 2 goods

Capital goods

Consumer Goods

Point A

4 Key lessons from a PPC

Scarcity (Tradeoffs)› More resources for one product means less

allocated to others Law of Increasing Opportunity Costs

› The more you want, the more you have to give up of other things

A perfectly efficient economy produces on the curve, instead of inside

Economic Growth› Goal of all economies› Moves by increasing factors of production

4 Assumptions to construct a PPC

Only 2 goods or services (or aggregates of goods or services) are produced.

Full and efficient use of all available resources.

Supplies of resources (i.e., land, labor, and capital) are fixed.

Technology is held constant.

Underutilization Using fewer resources than an

economy is capable of using

Efficiency A broad term that implies an economic state in which

every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.

Economic Growth

Over time, most countries see an increase in their ability to produce goods and services. This “economic growth” is shown as an outward shift of the PPC and results from a variety of factors› Improved technology› Better education› Discovery of new resources

Law of increasing costs

Law that states that as we shift factors of production from making one good or service to another, the cost of producing the second item increases

How is underutilization depicted on a production possibilities frontier?

Underutilization is shown by any point that appears inside the production possibilities frontier

How does a production possibilities curve illustrate the efficiency of an economy?

A production possibilities curve shows the maximum possible output along the production possibilities frontier. If a country’s economic production is on the frontier, the economy is producing at top efficiency

How does a production possibilities curve illustrate opportunity cost?

Opportunity cost can be illustrated by comparing the data at various points on the production possibilities frontier. As production of one element increases, the curve shows the decrease in production of the other element: opportunity cost.