Economics – The basic economic problem - Production possibility curve (PPC) diagrams | e-Consult

a) Trade-offs in Production:

The PPC diagram demonstrates the concept of opportunity cost. Producing more consumer goods means that fewer resources are available for the production of capital goods, and vice versa. The slope of the PPC represents the opportunity cost of producing one good in terms of the other. For example, to produce more consumer goods, the economy must give up the opportunity to produce more capital goods. The PPC shows the maximum possible combinations of consumer goods and capital goods that can be produced with the available resources.

b) Effect of Government Policy on PPC:

A government policy aimed at increasing the production of capital goods would cause the PPC to shift outwards. This is because the policy would likely involve increasing the investment in capital goods (e.g., infrastructure, machinery, equipment). This would increase the economy's productive capacity, allowing it to produce more of both consumer goods and capital goods. The new PPC would be further away from the original PPC, indicating a higher potential output for both goods.