Answer:

Diagram: A PPC diagram should be included here. The PPC should be shown shifting outwards. Label the axes (Goods A and Goods B) and clearly indicate the original and new PPCs.

Impact on Opportunity Cost: An outward shift in the PPC means the economy can produce more of both goods A and B. The opportunity cost of producing a particular good remains the same in absolute terms (the amount of the other good forgone). However, the opportunity cost in terms of the *relative* amount of the other good forgone *decreases*. This is because the economy is now more productive and can produce more of both goods with the same resources. The slope of the PPC becomes less steep.

Potential Benefits:

• Increased Overall Output: The economy can produce more of both goods, leading to greater wealth.
• Improved Efficiency: Investment in capital goods often leads to greater efficiency in production.
• Higher Potential for Economic Growth: Increased productivity is a key driver of long-term economic growth.

Potential Drawbacks:

• Resource Allocation Issues: The investment may not be optimally allocated, leading to inefficient use of resources.
• Potential for Inflation: If the increased investment is not matched by increased demand, it could lead to inflation.
• Environmental Concerns: Increased production can have negative environmental consequences.

In conclusion, while an outward shift in the PPC due to increased capital investment generally represents a positive development, it's important to consider the potential drawbacks and ensure that resources are allocated efficiently to maximize the benefits.

The Production Possibility Curve (PPC) is a graphical representation of the maximum possible combinations of two goods or services that an economy can produce, given its available resources and technology. It illustrates the trade-offs inherent in economic decision-making. Each point on the curve represents an efficient allocation of resources; points inside the curve represent inefficient allocation, and points outside the curve are currently unattainable with the available resources.

Key Assumptions:

• Fixed Resources: The PPC assumes a fixed quantity of resources (land, labour, capital, entrepreneurship) are available.
• Fixed Technology: The technology used to produce goods and services is assumed to be constant.
• Full Employment: The PPC assumes that all available resources are fully employed.
• Rational Decision-Making: Resources are allocated in the most efficient way to maximize output.

Shape and Interpretation: The PPC is typically bowed outwards (concave to the origin) due to the law of increasing opportunity cost. This means that as more of one good is produced, the opportunity cost of producing additional units of that good increases. This is because resources are not equally suited to the production of all goods. The shape reflects the increasing opportunity cost of switching resources from one activity to another.

Shifting Along the PPC:

• Movement along the curve represents an efficient reallocation of resources between the two goods. For example, shifting more resources to the production of computers means fewer resources are available for consumer goods.
• Outward shift of the PPC indicates economic growth, usually due to an increase in resources (e.g., population growth, discovery of new resources) or technological advancements. This allows the economy to produce more of both goods.
• Inward shift of the PPC indicates a decline in resources or a setback in technology.

Diagram: A standard PPC diagram would show two goods on the X and Y axes, with points plotted along a bowed-out curve. The axes would be labelled appropriately. Arrows would be used to illustrate movements along and shifts of the curve.

Opportunity Cost and the PPC: Opportunity cost is the value of the next best alternative forgone when making a choice. The PPC visually represents opportunity cost. Each point on the PPC represents a specific combination of two goods. To produce more of one good, resources must be diverted from the production of the other. The PPC illustrates the trade-off involved – the opportunity cost of producing more of one good is the amount of the other good that must be sacrificed.

Scarcity: The PPC demonstrates the fundamental economic problem of scarcity. Scarcity exists because resources are limited, but human wants are unlimited. The PPC shows that we cannot have everything we want; we must make choices about how to allocate our scarce resources. The PPC highlights the trade-offs inherent in these choices.

Efficiency of Resource Allocation: The shape of the PPC provides information about the efficiency of resource allocation.

• Points on the PPC represent efficient resource allocation – resources are being used to their fullest potential.
• Points inside the PPC represent inefficient resource allocation – resources are not being fully utilized. There is potential for improvement.
• Points outside the PPC are currently unattainable with the available resources and technology. An outward shift of the PPC is required to achieve these points.

The PPC essentially shows the boundary between what is achievable and what is not, given the current resource constraints and technological capabilities. It highlights the importance of making efficient choices to maximize output and avoid wasting resources.