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PPC Worksheet

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79 views6 pages

PPC Worksheet

Uploaded by

muhammad.seedat3.144
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Production Possibilities Curve

Part 1 - Constant versus Increasing opportunity cost PPCs

1. Study the PPC diagram below and answer the questions that follow:

a. Identify the points on Switzerland’s PPC that represent an efficient use of the
country’s land, labor and capital resources. Briefly explain what makes these
points “efficient”.
A,B,C,D. The PPC show how much of two goods can be produced with the
resources available. When it is on the line all of these factors of production are
being used efficiently to produce watches and chocolate.

b. Identify the points on Switzerland’s PPC that represent an inefficient use of the
country’s resources. Briefly explain what makes these points “inefficient”.
X,y. They can be using their resources more efficiently to produce more of these
goods.

c. Calculate the per watch opportunity costs of moving from


i. Point A to point B

167 chocolate bars = 500,000/3000

ii. Point B to point C

3000 watches and ½ million bars of chocolate

500,000/3000 = 166.667

iii. Point C to point D

3000 watches 6.5 million bars of chocolate

6,500,000/3000 = 2166.66

d. Explain why the per watch opportunity cost changes as output of watches
increases from 0 to 3,000 to 6,000 and finally to 9,000.
Because it is concave and therefore opportunity cost is increasing as it goes
further on the graph. At some point, if you only produce chocolates you going to
need resources that aren’t as effective at making chocolates (using
watchmakers)

e. Calculate the opportunity cost of moving from


i. Point X to point Y
Non existent

ii. Point Y to point C


N/A

f. Interpret the significance of the values you calculated in parts e(i) and e(ii) above.

g. Point Z lies beyond Switzerland’s PPC. Explain what this means and what would be
necessary for Switzerland to achieve point Z.
This means that Switzerland with their resources cannot produce these two
products in that quantity. Switzerland would need to improve their capital
resources in making these products and train their labourers or bring in more
immigrants to boost production.

2. Study the PPC diagram below and answer the questions that follow.

a. Calculate the per watch opportunity cost of moving from


i. Point A to point B

900/3000 = 0.3

ii. Point B to point C


900/3000
iii. Point C to point D
900/3000

b. Explain how the opportunity cost of watches changes as output of watches


increases from 0 to 3,000 to 6,000 to 9,000
Cost of watches increases as the output increases as resources and capital
goods used to produce these watches effectively become reduced, meaning
other capital goods or factors of production that aren’t as effective are used for
making watches.

c. Briefly interpret the the difference between the PPCs for chocolate and watches and
for watches and wall clocks. Why does the opportunity cost of producing more
watches change in such a different way as watch production increases in the two
models?
The opportunity cost on the straight line PPC remains the same, however with the
concave graph the opportunity cost increases due to less suitable resources being
used when producing such a large amount of one good.

Part 3 - Lessons of the PPC


2. How does the PPC model demonstrate the following basic economic concepts: a.
The basic economic problem?
There is a scarcity of resources, which results in choice. The PPC
demonstrates the different choices you can make in what is produced with the
limited resources available. It shows you can’t have as much as you want of
each product.

b. Tradeoffs, choices and opportunity costs?


It shows that as you pick to produce a certain combination of two goods then you
are sacrificing having more of one type of good over having more of another.
This shows that there is a choice that needs to be made, and with every choice
there is another alternative on the frontier (opportunity cost).

c. Efficiency?
To be efficient factors of production need to be used to their full extent, if you are
inside the frontier resources are not being used effectively and result in reduced
production of goods or services.

d. Inefficiency?

e. Economic growth?
If the economy grows, the frontier will move forward, meaning there will be an
increase in the production due to technological advancements, better quality
or quantity of resources.

3. Does the PPC tell a country what the best combination of two goods that it SHOULD
produce is? Explain.
The PPC cannot provide that amount of information as there are external factors which
come into play. For example, the demand of society would determine what a country
should produce and their effectiveness at producing a certain good so that they can
import other goods that they are less effective at producing.

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