Glossary
Allocative Efficiency
Producing the specific combination of goods and services that society desires most, reflecting the optimal distribution of resources based on societal preferences.
Example:
If a society values healthcare over luxury goods, the allocative efficient point on the PPC would prioritize healthcare production.
Capital Goods
Goods used to produce other goods and services, such as machinery, tools, and factories, which contribute to future productive capacity.
Example:
Investing in new robots for car manufacturing plants means producing more capital goods today, which will lead to more cars in the future.
Constant Opportunity Cost
Occurs when the PPC is a straight line, indicating that the amount of one good sacrificed to produce an additional unit of another good remains the same.
Example:
If a baker can easily switch between making 10 loaves of bread or 10 cakes with the same ingredients and effort, they face constant opportunity cost.
Decreasing Opportunity Cost
A theoretical concept where the PPC would be bowed inwards, implying that as more of one good is produced, less and less of the other good is sacrificed (not possible in real life).
Example:
While not realistic, if producing more advanced medical equipment somehow made it easier to produce basic consumer goods, that would imply decreasing opportunity cost.
Economic Contraction
A decrease in the productive capacity of an economy, represented by an inward (leftward) shift of the PPC, meaning less of both goods can be produced.
Example:
A devastating natural disaster that destroys infrastructure and resources could lead to an economic contraction.
Economic Growth
An increase in the productive capacity of an economy, represented by an outward (rightward) shift of the PPC, allowing for more of both goods to be produced.
Example:
Discovering vast new oil reserves or a technological breakthrough in renewable energy could lead to significant economic growth.
Efficiency
The state where an economy is using its resources in the most effective way possible to produce goods and services.
Example:
Achieving efficiency on the PPC means a country is getting the most output from its available inputs without waste.
Extreme Inefficiency
A point significantly far inside the PPC, indicating severe underutilization of resources, often associated with deep economic downturns or crises.
Example:
A country experiencing widespread civil unrest and a collapse of its industrial base would likely be operating at a point of extreme inefficiency.
Fixed Resources
A key assumption of the PPC, meaning the quantity and quality of available resources (land, labor, capital, entrepreneurship) remain constant.
Example:
When drawing a PPC for a small island nation, we assume the amount of arable land and the number of workers are fixed resources.
Fixed Technology
A key assumption of the PPC, meaning the current level of technological advancement used in production remains unchanged.
Example:
If a country's PPC is drawn assuming fixed technology, it means no new inventions or production methods are introduced during that period.
Increasing Opportunity Cost
Occurs when the PPC is bowed outwards (concave to the origin), meaning that as more of one good is produced, increasingly larger amounts of the other good must be sacrificed.
Example:
As a country shifts from producing only food to producing more cars, it must give up increasingly fertile land and skilled farmers, illustrating increasing opportunity cost.
Inefficiency
A situation where an economy is producing inside its PPC, indicating that resources are not being fully utilized or are being wasted.
Example:
During a recession, many factories might be idle and workers unemployed, leading to inefficiency and a point inside the PPC.
Opportunity Cost
The value of the next best alternative that must be forgone when a choice is made. It's what is given up to gain something else.
Example:
The opportunity cost of studying for your AP Macro exam for two hours might be the two hours of sleep you gave up.
Per-Unit Opportunity Cost
The amount of one good that must be given up to produce one additional unit of another good, calculated by dividing the amount given up by the amount gained.
Example:
If producing 10 more laptops means giving up 5 smartphones, the per-unit opportunity cost of a laptop is 0.5 smartphones.
Production Possibilities Curve (PPC)
A graph that shows the maximum possible combinations of two goods an economy can produce with its fixed resources and technology.
Example:
A country's PPC might show the trade-off between producing more cars and more food, illustrating how increasing car production means less food can be made.
Productive Efficiency
Producing goods and services at the lowest possible cost, meaning all resources are fully employed and used effectively. Any point on the PPC represents productive efficiency.
Example:
A factory operating at full capacity, producing its maximum output with its current resources, is demonstrating productive efficiency.
Quantity or Quality of Resources (as a shifter)
A factor that can shift the PPC; an increase in the amount or improvement in the effectiveness of land, labor, or capital leads to economic growth.
Example:
A massive influx of skilled immigrants or the discovery of new mineral deposits would represent an increase in the quantity or quality of resources, shifting the PPC outwards.
Scarcity
The fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources.
Example:
The fact that you can't have both unlimited video games and unlimited concert tickets illustrates the concept of scarcity.
Technology (as a shifter)
A factor that can shift the PPC; advancements in production methods or new inventions allow an economy to produce more output with the same inputs.
Example:
The invention of the internet dramatically improved communication and efficiency, acting as a powerful technology shifter for many industries.
Trade (as a shifter)
A factor that allows a country to consume beyond its own PPC by specializing in goods it produces efficiently and exchanging them for goods it produces less efficiently.
Example:
Even if a country can't produce bananas, through international trade, it can consume bananas by specializing in something else, like software, and exchanging it.
Unattainable
Any point located outside the PPC, representing a combination of goods that an economy cannot currently produce with its existing resources and technology.
Example:
Dreaming of producing enough food to feed the entire world and enough cars for every family on Mars with today's resources would be an unattainable point on Earth's current PPC.