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Key point 1
The definition of PPF:
1. the maximum productive potential (the essence of PPF)
2. a combination (the way to embody PPF)
3. be fully and efficiently employed (the prerequisite for PPF diagram)
PPF shows the maximum productive potential of an economy, using a combination of two goods and services when all the resources are fully and efficiently employed.
Key point 2
The economic implication of the points inside,outside or on the PPF
A, B and C are the points where all the resources are fully and efficiently employed.
Y is the unattainable point as the existing resources may fail to make point Y happen.
X is the point where the resources are underutilized.
Key point 3
PPF & Opportunity cost
Each combination means a choice.
Switching from one combination to another means choices are made, bringing about opportunity cost.
For example, the increasing output of product B comes at the cost of product A.
Hence, the opportunity cost of the expanding production of B is the production of A forgone.
Essay writing from past papers(CIE):
Explain how governments face increasing opportunity cost in their decision-making. Use a production possibility curve diagram to support your answer. (8’)
Tips and tricks in essay writing:
1. Define the economic concepts and give their definition. (Knowledge)
2. Illustrate each economic concept with an example, a logic chain or a diagram. (Application & Analysis)
3. If the words such as 'evaluate, assess, examine' and something like that can be found in the question, evaluation is needed. Perspectives like time period, significance and other relative economic principles are encouraged to be considered. (Evaluation)
Opportunity cost is the benefit of the next best alternative forgone. PPC is the maximum productive potential of an economy, using a combination of two goods and services when all the resources are employed fully and efficiently employed. (Knowledge)
Governments face opportunity cost when they have to decide what to produce. (Analysis) For example, the opportunity cost of government spending on public health is the spending on national defense that has to be forgone.(Application)
The opportunity cost increases as resources shift from the production of one type of good to another.The sacrifice may become greater as less resources are devoted to the production of its alternative goods and services. (Analysis)