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Production Possibility Curve | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

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Lesson Objectives

  • Definition of PPC
  • Points Under, On and Beyond a PPC
  • Movements Along A PPC
  • Shifts On A PPC

Definition of PPC

  • A production possibility curve shows the graphical representation of opportunity cost between the production of two categories / baskets / types of products
  • It is also called production possibility frontier (PPF) and opportunity cost curve (OCC)
  • It is never exact.
    • A graphical representation is approximate.
    • Shows the relation between the production of two sets of product using the same resources.
  • For example
    • I have enough resources to either produce 10 books
    • OR I can use the same resources to make 20 magazines
    • So the PPC will show how the transition occurs as I change the combination of the products.
  • A basic diagram

  • Here, in this diagram, we have two products that can be produced using the resources a country has: product X and Product Y
    • The point where the curve touches the Y axis (the vertical axis) is where all the resources of the country are devoted to the production of good X.
    • The point where the curve touches the X axis (the horizontal axis) is where all the resources of the country are devoted to the production of good Y
    • The optimum point is the best combination for the products as the production is maximum at this point.
    • At X1, Y 1, more resources are devoted to the production of Good X than Good Y
    • At X2 Y2 more resources are devoted to the production of Good Y than Good X

Points Under, On and Beyond a PPC

  • Points at different places on the PPC have different meanings.
  • See the diagram below

  • Any point inside the region A but NOT TOUCHING THE CURVE has two important factors
    • It is achievable with the current resources / factors of production available in an economy.
    • It is not utilizing the complete productive potential of the economy
      • Thus, the overall production is not utilizing all the resources of production as efficiently as possible
      • Thus, the total output is lower than it could have been
  • Any point outside the region is unachievable
    • It need more resources / factors of production than the economy has currently
  • Any point ON THE CURVE
    • Is producing at the productive potential of the economy using the current factors of production available in an economy AS EFFICIENTLY AS POSSIBLE.

Movement Along a PPC

  • Remember, movement along the curve and shift are two different things.
  • When you make a movement along the curve, your productive potential is the same. I.E. the maximum you can produce in the economy is still the same.
  • When you shift the curve itself, there is a change in the productive potential
  • See the diagram

  • What happened here is that as we moved from X0 Y0 to X1 Y1, we shifted more resources to the production of Product Y which were previously being used to produce product X. As such, the production of product Y increased, and the production of product X decreased.
  • However, we can see that a larger change in product X caused a smaller change in product Y
    • It means that more resources are required to product one single unit of product Y, than they are required to product one single unit of Product X
    • Thus, more than 1 unit of product X uses the same amount of resources that are used to produce just 1 unit of product Y
    • We will discuss this aspect further when we talk about advantages (comparative and absolute) later.
  • See the next diagram

  • The opposite is happening here
    • Resources are being shifted to the production of more good X from good Y
  • REMEMBER
    • In both the above diagrams, as the points are still on the curve
    • So the economy is still producing to its productive potential
    • There is still efficient use of resources
    • The only difference is that a changed combo of Good X and Good Y is being produced.

Shifts in a PPC

  • A shift means there has been a change in the productive potential of the economy i.e. the factors of production have changed
  • Consider the diagram

  • Here, the production possibility curve has moved outward. This means that the productive potential has grown.
    • There are either more factors of production in the economy now
      • More labor
      • More capital
      • More enterprise
      • More Land
    • OR
      • The quality of the resources has increased dramatically
    • A growth in the productive potential is also called Economic Development (DO NOT CONFUSE WITH ECONOMIC GROWTH – explained later)
  • The opposite can happen when the productive potential decreases for the opposite of the reasons mentioned above.

  • The increase of the factors can occur
    • By move investment in capital resources = capital
    • By better immigration and natural increase= labor
    • By more people adopting entrepreneurship = Enterprise
    • By new natural resource found like a new gold mine = Land
  • The quality of the factors can improve
    • Better technology = more efficiency possible for capital and labor.
    • Better training and education = label productivity better than before
  • The decrease and reduction in quality can occur for the opposite reasons
  • Difference between growth and development
    • Economic growth means an increase in the output / GDP between different periods.
      • It does not mean that productive potential has increased.

  • Here, the production and output has increased as move overall output is being produced.
    • However, the curve has not shifted outwards.
  • A continuous period of economic growth can lead to economic development
    • Why?
      • As the output increases, people start investing in better technology
      • Similarly, labor trains more and some get better education from abroad.
      • Etc.
  • The opposite occurs with a continuous period of recession
    • Recession is reduction in the output
    • A period of continuous recession that causes productive potential to fall and the PPC to shift inwards is called economic decline.
  • Also
    • When you are making PPC for the entire economy call Product Y Capital Goods and Product X Consumer Goods (or vice versa)
Hunain Zia

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