Glossary
Allocative Efficiency
Producing the specific mix of goods and services that society desires most, which is a single optimal point on the Production Possibilities Curve.
Example:
If society values education more than military spending, an economy achieves allocative efficiency by producing more schools and fewer tanks, reflecting societal preferences.
Change in Quantity/Quality of Resources
A factor that shifts the PPC; an increase in available resources (e.g., more labor, better land) or an improvement in their quality shifts the curve outward, while a decrease shifts it inward.
Example:
The discovery of a large new oil field represents a change in the quantity of resources, allowing a nation to produce more energy and other goods.
Change in Technology
A factor that shifts the PPC; advancements in production methods or new inventions allow more output to be produced with the same amount of resources, shifting the curve outward.
Example:
The invention of automated farming equipment represents a change in technology, enabling farmers to produce significantly more crops with the same amount of land and labor.
Constant Opportunity Cost
A situation where the opportunity cost of producing an additional unit of a good remains the same, regardless of how much of that good is already being produced, resulting in a straight-line PPC.
Example:
If a baker can always convert exactly two loaves of bread into one cake, regardless of how many loaves or cakes they make, they face constant opportunity cost.
Economic Contraction
A decrease in the total output of an economy, represented by an inward shift of the Production Possibilities Curve, meaning less of both goods can be produced.
Example:
A widespread natural disaster that destroys factories and infrastructure could cause economic contraction, shrinking a country's productive capacity.
Economic Growth
An increase in the total output of an economy, represented by an outward shift of the Production Possibilities Curve, allowing for more of both goods to be produced.
Example:
The development of new renewable energy technologies could lead to economic growth, expanding a nation's ability to produce both energy and other goods.
Efficient (Points on PPC)
Any point located directly on the Production Possibilities Curve, representing a combination of goods produced when all resources are fully and productively employed.
Example:
If a car manufacturer is producing at an efficient point on its PPC, it means every worker and machine is being utilized to its fullest potential to produce cars and trucks.
Increasing Opportunity Cost
A principle stating that as production of one good increases, the opportunity cost of producing an additional unit of that good also increases, causing the PPC to be bowed-out.
Example:
As a country shifts more resources from producing food to producing cars, the increasing opportunity cost means that each additional car requires giving up progressively larger amounts of food.
Opportunity Cost
The value of the next best alternative that must be forgone when a choice is made. It is the true cost of any decision.
Example:
If a city decides to build a new park on a plot of land, the opportunity cost might be the new school that could have been built there instead.
Production Possibilities
All the different combinations of goods and services an economy can produce efficiently with its limited resources and technology.
Example:
A bakery, with its current ovens and staff, has various production possibilities for making different quantities of cakes and cookies.
Production Possibilities Curve (PPC)
A graph that illustrates the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed.
Example:
The Production Possibilities Curve for a country might show the maximum combinations of consumer goods like smartphones and capital goods like factory machinery it can produce.
Productive Efficiency
Producing goods and services at the lowest possible cost, which is represented by any point on the Production Possibilities Curve.
Example:
A company achieves productive efficiency when it produces its output using the fewest possible inputs, like a factory streamlining its assembly line to minimize waste.
Scarcity
The fundamental economic problem that arises because human wants for goods, services, and resources exceed what is available. It forces individuals and societies to make choices.
Example:
Even a billionaire faces scarcity of time, as they cannot attend every event or pursue every hobby simultaneously.
Trade (PPC Shifter)
A factor that allows a country to consume beyond its own Production Possibilities Curve by specializing in goods it produces efficiently and exchanging them for other goods.
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.
Trade-offs
The act of giving up one benefit in order to gain another, due to the necessity of making choices in the face of scarcity.
Example:
Deciding to spend Saturday studying for the AP Micro exam means a trade-off of not being able to go to the beach with friends.
Unattainable (Points outside PPC)
A point located outside the Production Possibilities Curve, representing a level of production that is currently impossible to achieve with the existing resources and technology.
Example:
A small coffee shop cannot produce 10,000 lattes in an hour with its current equipment and staff; this production level is unattainable.
Underutilization (Points inside PPC)
A point located inside the Production Possibilities Curve, indicating that an economy is not using all of its resources or is using them inefficiently.
Example:
During a recession, many factories might be idle and workers unemployed, leading to underutilization of resources and production inside the PPC.