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In the 5Es lesson we learned that
economics is about making choices. Choices are forced upon
us as a result of scarcity. Here we will study a graphical
model, the Production Possibilities Curve (PPC) that shows
us that we MUST MAKE choices and it highlights some of the
consequences of making choices. Then we will look at HOW to
make good choices by using Benefit Cost Analysis
(BCA).
The production possibilities curve
will show us that all decisions have costs. Economists call
these "opportunity costs". ALL COSTS IN ECONOMICS ARE
OPPORTUNITY COSTS. Whenever we discuss the "costs" of doing
something we will mean the complete opportunity
cost.
What is the connection between the
PPC and BCA? Well, when studying the PPC you will learn the
important concept of "opportunity cost". Learn the
definition well. Since all costs in economics are
opportunity costs, then when using BCA, "marginal costs"
means the additional opportunity costs.
Also, since economic growth is one of
the three macroeconomic issues. We will use the PPC to
demonstrate the two types of "economic growth":
- an economy ACHIEVING
ITS POTENTIAL
- and an economy INCREASING ITS POTENTIAL
Achieving the potential is caused
by reducing unemployment or achieving productive efficiency.
On the graph it is moving from a point inside the PPC to a
point on the SAME CURVE. Increasing the potential, or what
we will call economic growth, is shown on the PPC as the
whole curve shifting out to a NEW CURVE. We will see this
again in chapter 8.
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