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1.4. Production Possibility Curves: 1.4.1. Definition of PPC

The document defines and provides examples of key concepts relating to production possibility curves (PPC). It begins by defining a PPC as illustrating the maximum output of two goods given available resources and technology. Points on, within, and beyond the PPC are then explained. Specifically, points on the curve represent efficient production combinations while within is inefficient. Beyond is currently unattainable. Movements along the curve demonstrate opportunity cost. Shifts in the PPC can occur from changes in resources, with outward representing economic growth and inward representing decline. Examples and exercises are provided to demonstrate these concepts.

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259 views

1.4. Production Possibility Curves: 1.4.1. Definition of PPC

The document defines and provides examples of key concepts relating to production possibility curves (PPC). It begins by defining a PPC as illustrating the maximum output of two goods given available resources and technology. Points on, within, and beyond the PPC are then explained. Specifically, points on the curve represent efficient production combinations while within is inefficient. Beyond is currently unattainable. Movements along the curve demonstrate opportunity cost. Shifts in the PPC can occur from changes in resources, with outward representing economic growth and inward representing decline. Examples and exercises are provided to demonstrate these concepts.

Uploaded by

Anushka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1.4.

Production Possibility Curves


Learning Outcomes:

• Definition, drawing and interpretation of appropriate diagrams.


• The significance of the location of production points.
• Movements along a PPC and opportunity cost.
• The causes and consequences of shifts in a PPC in terms of an economy’s growth.

1.4.1. DEFINITION OF PPC


The production possibility curve (PPC) is a graphic model that illustrates the combined maximum
output possibility of two goods that can be produced efficiently given the existing resources and
technology. This model assumes that all resources are used up efficiently, hence no unemployment.

Figure 1.4.1: Production Possibility Curve (PPC)

Exercise 1.4.1: Drawing PPC Practice


Step 1: Construct the x- and y-axis of a graph.
Step 2: Think of any two goods. Label the first good on the x-axis and the second good on the y-axis.
Step 3: Draw a downward-sloping curve from the y-axis to the x-axis.
Step 4: Plot any two points on the curve you drew in step 3.

Step 5: Draw dotted lines from those two points in step 4 to their respective x- and y-axis.

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1.4.2. POINTS UNDER, ON AND BEYOND A PPC
Suppose you are a farmer producing apples and oranges. Using the resources that you have, you can
produce either 90 apples or 100 oranges a day. Therefore, the PPC below shows that you need to give
up 100 oranges to produce 90 apples each day. However, you will most likely choose to produce a mix
of apples and oranges with your resources to diversify your output.

Figure 1.4.2: PPC for Apples and Oranges


100
90 A
B
80
G
70 C
60
Apples

50
40 D
30 F
20
10
0 E
0 20 40 60 80 100 120
Oranges

Points A-G on the figure above represents a point of production.


All the production points plotted along a PPC (points A – E) represent a possible combination of output
between apples and oranges.
If the production point is within the PPC, there will be an inefficient allocation of resources which may
result in unemployment. Point F in the PPC above illustrates this situation.
On the other hand, point G represents an output level that is currently unattainable due to scarce
resources. However, if the quality and quantity of factors of production increases, point G may be
attainable in the future.

1.4.3. MOVEMENTS ALONG A PPC


As the production point moves along the Figure 1.4.3: Movement Along a PPC
PPC from left to right, resources are being
allocated from producing apples to
oranges, leading to lesser apples and an
increase in the output of oranges.
For instance, if you decide to move from
point B to C, you’ll be giving up 15 apples
to produce an additional 30 oranges.
Thus the opportunity cost to you, the
farmer, for producing the additional 30
oranges is the 15 apples that could have been produced with the scarce resources.

2
Exercise 1.4.2: PPC Production Points
Use the PPC in Figure 1.4.2 to answer the following questions.

1) What is the opportunity cost if the production point moves from:


• B to C? _________________________________
• C to D? _________________________________
• D to E? _________________________________
• E to D? _________________________________

2) What does Point F represent?


Point F represents an ___________________ allocation of resources. This may result in
_________________.

3) What does Point G represent?


Due to ____________ resources, point G represents a level of output that is currently
______________. However it may be possible to produce at this point in the future if the
___________________________ of factors of production increase.

1.4.4. SHIFTS IN A PPC


Recall from 1.2 the several factors that could influence the quality and quantity of the factors of
production. The entire PPC of an economy can shift as a result of these changes.
If quality and quantity of factors of production increase, then

• The PPC would shift outwards in the long-term.


o Output of both goods will increase. This is because more resources allows for
producing more of one good without reducing the output of another.
o This represents economic growth.
By contrast, if there is a decrease in the quality and quantity of factors of production, then

• The PPC would shift inwards in the long-term.


o Output of both goods will decrease. This is usually caused by natural disasters.
o This represents economic decline.

PPC Shifts Outward PPC Shifts Inward

3
Exercise 1.4.3: Practice Exam Question
1.









2. Indonesia’s output is influenced by its factors of production. A production possibility curve diagram can
be used to show this relationship between resources and output. Indonesia does have extensive fishing
waters but does not actually catch many fish. Most of its fishing firms are small and they compete against
much larger foreign firms. These larger foreign firms have been attracted into Indonesia’s waters
because of increasing demand for fish. The price elasticity of demand for different types of fish has
changed in the last few years. 


(a) Identify the two human factors of production. [2 marks] 


______________________________________________________________________________
(b) Explain two economic concepts shown by a production possibility curve diagram. [4 marks]


Master Your Definitions


Production Possibility Curve (PPC): a graphic model that illustrates the combined maximum output possibility of two
goods that can be produced efficiently given the existing resources and technology.

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