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Labeled production possibility curve how to#
Labeled production possibility curve full#

The cookie is used by cdn services like CloudFlare to identify individual clients behind a shared IP address and apply security settings on a per-client basis. These cookies ensure basic functionalities and security features of the website, anonymously. Necessary cookies are absolutely essential for the website to function properly. This shows a trade-off between working and hours spent in leisure. If the government increases spending on the military, then the opportunity cost will be less spending on another public service, such as health care.

Labeled production possibility curve how to#

PPF and recessionĪ recession can be shown by output falling below the production possibility frontier (from A to B).Īny government faces a trade-off in how to use scarce resources and tax revenue. Similarly, a decline in investment can enable more consumer goods in the short-term but can lead to lower rates of economic growth. Increase in capital goods has an opportunity cost of fewer consumer goods, but in long-term can enable economic growth.

However, if the investment is successful, then in the long-run, productive capacity will increase and the PPF curve will shift to the right.

building new factories) then in the short-term, consumption will go down.

If more resources are devoted to capital goods (e.g.

One choice an economy faces is between capital goods (investment) and consumer goods. Production possibility frontier and investment If the PPF curve shifts to the right, then it is similar effect to the LRAS shifting to the right Note: there is a link between macroeconomics and the long-run aggregate supply curve. If there is an increase in land, labour or capital or an increase in the productivity of these factors, then the PPF curve can shift outwards enabling a better trade-off. On the PPF curve, it is impossible to increase one choice, without causing less production of the other.

Pareto efficiency is any point on the PPF curve.

At point D, we can increase both goods and services without any opportunity cost.

At point D, the economy is inefficient.

But, the opportunity cost is that output of goods falls from 22 to 18.

Moving from Point A to B will lead to an increase in services (21-27).

Diagram of Production Possibility Frontier

Labeled production possibility curve full#

The difference between actual output and potential output when an economy is producing less than full employment output when there is a negative output gap, the rate of unemployment is greater than the natural rate of unemployment and an economy is operating inside its PPC.A production possibility frontier shows how much an economy can produce given existing resources.Ī production possibility can show the different choices that an economy faces.įor example, when an economy produces on the PPF curve, increasing the output of goods will have an opportunity cost of fewer services. The difference between actual output and potential output when an economy is producing more than full employment output when there is a positive output gap, the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its PPC. The straight line in the business cycle model, which is usually upward sloping and shows the long-run pattern of change in real GDP over time The level of output an economy can achieve when it is producing at full employment when an economy is producing at its potential output, it experiences only its natural rate of unemployment, no more and no less. When GDP begins to increase following a contraction and a trough in the business cycle an economy is considered in recovery until real GDP returns to its long-run potential level. The turning point in the business cycle between a recession and an expansion during a trough in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again. The turning point in the business cycle between an expansion and a contraction during a peak in the business cycle, output has stopped increasing and begins to decrease. The phase of the business cycle during which output is falling The phase of the business cycle during which output is increasing The total supply of goods and services produced by a nation’s businesses The total demand for a nation’s output, including household consumption, government spending, business investment, and net exports A model showing the increases and decreases in a nation’s real GDP over time this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output.