Module 3
The Production
Possibilities
Curve Model
In this Module, you will learn to:
• Explain the importance of trade-offs in economic analysis
• Describe what the production possibilities curve model tells us about efficiency,
opportunity cost, and economic growth
• Explain why increases in the availability of resources and improvements in
technology are the two sources of economic growth
Trade-offs: The Production Possibilities Curve
• Resources are scarce. As a result, any economy—whether it contains one person
or millions of people—faces trade-offs. You make a trade-off （取舍） when you give
up something in order to have something else.
• The production possibilities curve illustrates the trade-offs facing an economy that
produces only two goods. It shows the maximum quantity of one good that can be
produced for each possible quantity of the other good produced.
• Consider a simplified economy that produces only two goods. This simplification
enables us to show the trade-offs graphically.
Trade-offs: The Production Possibilities Curve
Efficiency
• An economy is efficient （有效率的） if there is no way to make anyone better
off without making at least one person worse off.
• An economy achieves productive efficiency （生产效率） if it produces at a
point on its production possibilities curve.
• An economy achieves allocative efficiency （分配效率） if it produces at the
point along its production possibilities curve that makes consumers as well
off as possible.
Opportunity Cost
• The production possibilities curve is also useful as a reminder that the true cost of
any good is not only its price, but also everything else in addition to money that
must be given up in order to get that good—the opportunity cost.
• Opportunity Cost = Opportunity Lost (The financial or nonfinancial cost of a choice
not taken.)
• The slope of a straight-line production possibilities curve is equal to the
opportunity cost
-Specifically, the opportunity cost for the good measured on the horizontal axis in
terms of the good measured on the vertical axis.
Opportunity Cost
Economic Growth
• Economic growth means an expansion of the economy’s production possibilities:
the economy can produce more of everything.
Economic Growth
• What can cause the production possibilities curve to shift outward? There are two
general sources of economic growth. One is an increase in the resources used to
produce goods and services: labor, land, capital, and entrepreneurship.
• The other source of economic growth is progress in technology, the technical
means for the production of goods and services.
• Either invention would shift his PPC outward. However, the shift would not be a
simple outward expansion of every point along the PPC.
Technology specific to the production of only one good has no effect if all resources
are devoted to the other good
Review:Check Your Understanding
1. True or false? Explain your answer.
a. An increase in the amount of resources available to Tom for use in producing
coconuts and fish does not change his production possibilities curve.
b. A technological change that allows Tom to catch more fish relative to any amount
of coconuts gathered results in a change in his production possibilities curve.
c. Points inside a production possibilities curve are efficient and points outside a
production possibilities curve are inefficient.