Unit 1: Economics and Globalization

Lesson 1c: Making Choices - The Production Possibilities Curve (PPC) and Benefit-Cost Analysis



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":


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.



Lesson 1c