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Explain the concept of the production possibility curve.

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The production possibilities curve (PPC) is simply a device for illustrating a couple of fundamental points about economics.  One of these is the concept of efficiency and economic growth.  The other, and more important, concept is the concept of opportunity costs.  To think about this, refer to the image that I have linked to below.  There, we have an imaginary economy that can make computers and food. 

The PPC illustrates the idea of efficiency and inefficiency in an economy.  It shows us that an economy can make certain combinations of goods when it runs at peak efficiency (given a certain amount of resources).  It shows us that anything inside the curve is less than what the economy could make.  That emphasizes to us that economies have to have resources and they have to use them well.  Finally, it shows us that there are levels of production that are simply impossible unless the economy can find new resources or new technologies.  This tells us that such things are necessary for economic growth.

The other thing the PPC tells us is that opportunity costs exist.  In order to make more computers, this economy has to give up the chance to make some food.  In order to make food, it has to give up the chance to make more computers.  If an economy is working efficiently (if it is on the curve of the PPC), it cannot make more of one thing without giving up the chance to make some of the other thing.

These are the most important concepts that the PPC teaches us.

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Define the production possibilities curve.

A production possibilities curve (PPC) is a curve that shows the maximum amounts of two different goods or services that an economy can produce at a given time.  It is useful for a couple of reasons.  First, it can illustrate the idea of opportunity cost.  Second, it can help us to understand the ideas of efficiency and inefficiency in an economy as a whole. 

As you can see in the file that I have attached below, a PPC shows us how much of two goods our economy can produce.  This assumes that our economy has fixed resources.  In the file, we can see that our economy produces two goods, Good A (sorry, the Good A label got cut off) and Good B.  We can see that whenever we produce more of Good B, we have to give up some of Good A.  This is shown by a movement from Point A to Point B on the curve.  That shows us that there is an opportunity cost that comes with producing more of either good. 

The PPC also shows us about efficiency and inefficiency.  Any point on the curve is efficient; it represents a point where our economy cannot make any more total goods.  Points A and B are efficient.  It also shows us inefficiency.  Point C is inefficient as we are not making as many things as we could.  Perhaps not all of our people have jobs at this point.  Point D is impossible with our current level of resources and technology.  To get to Point D, we need economic growth through finding more resources or inventing new technology.

Thus, a PPC can show us many things about opportunity cost, efficiency, and economic growth.

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