Production Possibility Curve
Question 1
There is a range of factors that influence the supply of economic goods, including natural
disasters. Recently a series of earthquakes in one country destroyed buildings, including factories
and offices. One factory that survived has since increased its scale of production. This firm has
employed more factors of production and has experienced a fall in its average cost of production.
Analyse, using a production possibility curve diagram (PPC), the effect of the destruction of
some of its resources on an economy.
The destruction of resources will reduce the maximum output a country can produce (1). This
will move the production possibility curve to the left from curve AA to curve BB (1) meaning
less of both Good x and Good Y can be produced (1)
Question 2
In March 2017, Peru was hit by floods and the strongest winds in decades. Roads, bridges,
houses and capital goods were destroyed. It is expected that the damage caused will affect Peru’s
Human Development Index (HDI) and economic growth rate. In 2016, Peru experienced a 4%
economic growth rate which was higher than the growth rate of the USA
Analyse, using a production possibility curve (PPC) diagram, the effect of damaging weather on an
economy
Bad weather will reduce the quantity of resources that an economy has e.g. a drought will
reduce the quantity and quality of land (1). Therefore, the amount that can be produced with
fewer resources will fall (1). This is shown by the inward shift on the PPC which illustrates a
fall in productive capacity (1)
Question 3
Russia’s birth rate fell by 11% in 2017 to its lowest level for a decade. Over the next 30 years,
Russia’s population is forecast to fall from 144 million to 107 million. The government
announced measures to reverse this decline in population. In 2017, it also announced
privatisation plans and measures to reverse a decrease in investment which could lead to a fall in
the quantity of capital goods. Privatisation can reduce monopoly power in a market.
Analyse, using a production possibility curve (PPC) diagram, the effects of a decrease in the
quantity of capital goods in an economy
Capital goods are a resource used to produce other goods (1) such as a robotic arm in a car
factory. Therefore, fewer capital goods would reduce the potential output in the economy (1),
shown by the leftward shift in the PPC from AA to BB (1)
Question 4
The main industries in the Seychelles, an island country in the Indian ocean, are tourism and fishing. The
price elasticity of supply of fish is affected by the relatively short time that fish can be stored. Economic
goods and free goods play a role in both fishing and tourism. With rises in the skills of workers and an
increase in enterprise, GDP per head has increased by more than seven times over the last fifty years.
Analyse, using a production possibility curve diagram, effect of an increase in enterprise on an economy
An increase in enterprise means that the supply of risk takers and new firms in the economy is
higher (1). This increases the productive capacity (1), and will lead to economic
growth (1). This is shown through the outward shift of the PPC from AA to BB (1)
Question 5
Estonia has one of the fastest internet speeds in the world. The government allows both direct
and indirect taxes to be paid online. According to the World Bank, it is very easy for a firm to
deal with construction permits and to register property in Estonia. A low level of government
regulation affects how easy it is to start and to run a firm. Many new firms are labour-intensive
but some become more capital-intensive as they grow.
Analyse, using a production possibility curve (PPC) diagram, the possible effects of faster
internet speeds for economic growth
Faster internet speed increases the maximum quantity of products that can be produced within a
certain time period (1). This is due to better communication infrastructure (1) so capital is now
improved causing an outward shift in the PPC from A to B (1)
Question 6
In 2016, the Indonesian government increased its spending on healthcare and education and considered
raising the school leaving age. The government also planned to increase taxation. Such a move might
conflict with its aim of reducing unemployment at a time when a number of countries were at risk of
entering a recession.
Analyse, using a production possibility curve diagram, the effects of high unemployment in a country
High unemployment means that the available labour resources are not fully (1) and efficiently
used (1). The economy will not be able to produce at its maximum level output (1) which is
found anywhere on the PPC curve (1). It will be producing inside the curve and this is shown by
point X on the diagram (1)
Question 7
The production process in the oil industry is capital-intensive. The pollution it generates means it
is one cause of environmental market failure. A Nigerian oil monopoly is starting to produce
more environmentally friendly liquefied petroleum gas (LPG), rather than kerosene, in an
attempt to reduce pollution. The Nigerian government intends to split the monopoly firm into
separate companies to improve efficiency.
Analyse, using a production possibility curve (PPC) diagram, the effect of reallocating resources
from kerosene to LPG.
Reallocating resources from producing kerosene to producing LPG will cause a movement
along the PPC (1) from A to B (1). The opportunity cost of moving from L1 to L2 in LPG
production (1) are the lost units of kerosene production equal to K2 - K1 (1)
