Overview
This lecture explains how and why the production possibilities curve (PPC) shifts in economics, focusing on resource changes, technology, and trade.
The Production Possibilities Curve (PPC)
- The PPC shows the maximum output combinations of two goods an economy can produce with current resources and technology.
- Points inside the PPC represent inefficiency; points on the PPC are efficient; points outside are unattainable.
- The PPC shifts outward if more resources or better technology become available.
Causes of PPC Shifts
- The PPC shifts due to changes in the quantity or quality of resources or changes in technology.
- Trade allows countries to consume beyond their PPC by specializing and exchanging goods at lower opportunity costs.
- Trade increases possible consumption but does not increase production capacity.
Practice Scenarios for Shifting the PPC
- Faster computers and better technology shift the PPC outward (more of both goods can be produced).
- Destruction of power plants shifts the PPC inward (less of both goods can be produced).
- Increased unemployment does not shift the PPC; it results in a point inside the curve (inefficient use of resources).
- Increased education improves worker quality, shifting the PPC outward (greater production possible).
Consumer Goods vs. Capital Goods
- Consumer goods: produced for direct use (e.g., pizza).
- Capital goods: used to produce other goods (e.g., ovens, machinery).
Key Terms & Definitions
- Production Possibilities Curve (PPC) — a graph showing possible output combinations of two goods with given resources and technology.
- Consumer Goods — goods for direct consumption by individuals.
- Capital Goods — goods used to produce other goods.
- Human Capital — the skills and knowledge of workers.
- Comparative Advantage — the ability to produce a good at a lower opportunity cost than others.
Action Items / Next Steps
- Practice drawing PPCs for each scenario (technology improvement, resource loss, unemployment, better education).
- Watch the next video on comparative advantage for deeper understanding.
- Watch episode three of "Econ Movies" for further explanation using examples.