Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- A PPC shows the maximum combinations of two goods an economy can produce with its resources and technology.
- It illustrates scarcity (a boundary), trade-offs (more of one means less of the other on the curve) and opportunity cost (what is given up).
- On the curve: efficient. Inside: inefficient, with unemployed or misused resources. Outside: unattainable now.
- Shape: straight = constant opportunity cost; bowed outward = increasing opportunity cost (specialised resources); bowed inward = decreasing opportunity cost (rare).
- Economic growth = outward shift; contraction = inward shift.
Key relationships
| Relationship | How to use it |
|---|---|
| Opportunity cost of 1 X = Y given up ÷ X gained | Use changes between two points, not levels |
| Opportunity cost of Y = 1 ÷ (opportunity cost of X) | Between the same two points |
| Slope of PPC (size) = opportunity cost of the good on the horizontal axis | Constant slope → constant cost |
| Linear PPC: cost of X = (max Y) ÷ (max X) | e.g. 40 bicycles or 20 wheat → 1 wheat costs 2 bicycles |
| Change | Effect on the graph |
|---|---|
| More or better resources; better technology for both goods | outward shift |
| Better technology for one good | pivot out on that good’s axis |
| Loss of resources (disaster, shrinking workforce) | inward shift |
| Unemployed resources put back to work | point moves from inside towards the curve |
| Society chooses a different mix | movement along the curve |
Assumptions behind the model
- Two goods; fixed quantity and quality of resources; fixed technology.
- Points on the curve assume full employment and efficient use of resources.
Mistakes to avoid
- Calling a point inside the curve “unattainable”.
- Saying lower unemployment is an outward shift.
- Using the level of a good instead of the change when calculating opportunity cost.
- Forgetting to state the unit (“2 bicycles per tonne of wheat”).
- Shifting the whole curve when technology improves for one good only.
- Unlabelled axes: always name both goods and their units.
Quick self-check
- A straight PPC runs from 30 laptops to 60 tonnes of rice. What is the opportunity cost of 1 tonne of rice? (30 ÷ 60 = 0.5 laptops)
- Does a fall in unemployment shift the PPC? (No: the point moves from inside towards the curve.)
- Why is a typical PPC bowed outward? (Resources are not equally suited to both goods, so the opportunity cost rises as you make more of one.)
Next: practice questions.