Unit 1: Economics and Globalization

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

Outcomes - What you should learn


- PPC (Production Possibilities Curve)
- BCA (Benefit Cost Analysis or Marginal Analysis)


Production Possibilities

Construct a production possibilities curve (PPC) when given appropriate data; what is the production possibilities curve (PPC) or production possibilities frontier (PPF)?; what does it show?

What are the assumptions behind the PPC

Illustrate the following using the production possibilities curve:

- we must make choices
- choices have opportunity costs
- the law of increasing costs
- the effect of unemployment
- the effect of productive inefficiency
- how present choices affect future possibilities
- the effect of international trade
- two types of "economic growth"
- it does NOT show the optimum product mix (allocative efficiency)

Explain WHY the PPC has the shape that it does -- concave to the origin. What is the law of increasing cost?

Why are there increasing costs? Why is the PPC concave to the origin? (Draw, Define. Describe all graphs)

What would the PPC look like if there were constant costs?

What does a point outside the PPC represent?

What two things (2 Es) would a point inside the PPC indicate?

Give some real-world applications of the production possibilities concept.

Summarize the general relationship between investment and economic growth.

Describe the two types of economic growth ("achieving the potential" and "increasing the potential") and explain how are they shown on a PPC?

What would cause a PPC to shift inward?

Use a PPC to illustrate the effect of international trade

Be able to draw and explain the Circular Flow Model

Benefit Cost Analysis

define benefit cost analysis (BCA) and use it to solve problems

define "marginal" and give examples

define marginal benefits (MB) and marginal costs (MC)

know what happens if MC increase? decrease?

know what happens if MB increase? decrease?

draw MB and MC on a graph and explain their shapes

be able to find the optimum choice from a table of total costs and total benefits and from a table of marginal costs and marginal benefits

use BCA to explain why Drivers with airbags may take more risks or why skiers with air bags may take more risks

what is a "sunk cost" (or fixed cost) and why are they ignored when using benefit-cost analysis?

"Don't cry over spilt milk " If you are deciding whether or not to come to class today, why does it not matter that you have already paid tuition? Why is the fact that you have paid tuition irrelevant when trying to decide whether to attend class today or skip?



Lesson 1c