Embedded Files
1.4 Production possibility curve
Chapter Objective:
Chapter Objective:
By the end of this chapter, you will be able to able to:
> define a production possibility curve (PPC)
> draw and interpret appropriate PPC diagrams
> explain the significance of the location of production points on PPC diagrams
> explain the causes and consequences of shifts and movements of the PPC.
Production possibility curve diagrams
The production possibility curve (PPC) shows the maximum combination of any two categories of goods and services that can be produced in an economy, at any point in time. Essentially, it shows the productive capacity of the economy.
Assume a country can only produce two types of goods: wooden furniture and olive oil. It has a limited amount of land, labour and capital. In Figure 4.1, if producers wish to increase production of olive oil from O1 to O2 then the amount of wooden furniture manufactured will have to decrease from W1 to W2. The opportunity cost of producing the extra O1 to O2 litres of olive oil is therefore W1 to W2 tonnes of wooden furniture.
Production Possibilility Curve of a country that produces wooden furniture and olive oil
It is important to be aware of the significance of the location of production points, and be able to explain points under, on and beyond a PPC.
The production points 1 are as follows:
» Point A — all resources are dedicated to the production of wooden furniture.
» Point B — all resources are dedicated to the production of olive oil.
» Point C — W1 tonnes of wooden furniture are produced along with O1 litres of olive oil.
» Point D — W2 tonnes of wooden furniture and O2 litres of olive oil are produced.
» Point E — this point is beyond the production possibility curve and lies outside the productive capacity of the economy, so it is currently unattainable.
» Point F — this point is within the productive capacity of the economy, so the production of both olive oil and wooden furniture can increase without any opportunity cost as some factors of production are currently not being used.
Causes and consequences of shifts and movements of the PPC
Movements along the curve
Movements along the curve
For a country to be on its PPC two conditions have to be met:
» All resources are used — there is no unemployment of factors of production.
» There is efficiency in the use of resources — factors of production are allocated to their best use/purpose.
A movement along a PPC results in an opportunity cost. This means that to produce more of one product, there must be less of another product. In Figure 4.2, a movement along the PPC from point X to point Y means more consumer goods are produced (from A to B), but at the expense of fewer producer goods (from C to D).
Shifts of the Curve
A country's production capability can increase or decrease, which is shown by shifts in the PPC.
Outward Shift of the PPC
Outward Shift of the PPC
In order for the PPC to shift outwards from PPC1 to PPC2, there must be economic growth. This can be achieved in 2 ways.
» An increase in the quality of factors of production (see Chapter 2), such as more highly skilled labour achieved through investments in education, research and training. Increased productivity can also be caused by technological advances and improved production techniques.
» An increase in the quantity of factors of production, such as the discovery of new resources, the reclamation of land, or net migration of labour into a country.
When the PPC shifts outward from the PPC1 to PPC2, it means the economy can produce more goods and services, without necessarily incurring an opportunity cost.
Economies strive to increase their productive capacity. For example, advances in technology will result in higher productivity and output for an economy. This means that even with the same amount of factors of production, more can be produced, resulting in an outward shift of the PPC.
Inward Shift of the PPC
Inward Shift of the PPC
Detrimental changes can cause the PPC to shift inwards. These
changes might include a powerful storm, a natural disaster or a war that destroys a large proportion of the economy’s farmland, factories and infrastructure.
The PPC shifts inwards from PPC1 to PPC2 and represents a decrease in the productive capacity of the economy.
Chapter Review Questions
What is meant by productive capacity?
What is meant by productive capacity?
What does a production possibility curve diagram show?
What does a production possibility curve diagram show?
How is the concept of opportunity cost shown on a PPC diagram?
How is the concept of opportunity cost shown on a PPC diagram?
Which two conditions must hold for an economy to be operating on its PPC?
Which two conditions must hold for an economy to be operating on its PPC?
What are the causes of a shift of the PPC?
What are the causes of a shift of the PPC?
Page updated
Google Sites
Report abuse