Deciding which goods to produce and the concept of opportunity cost
can be illustrated using production possibility curves (PPCs).A PPC
shows the different combinations of two goods that can be produced
if all resources in a country are fully used. It shows the maximum
quant ties of goods that can be produced. A PPC for a country is
shown in Figure 1.6. Itis assumed that the
country can produce consumer goods or capital goods.What does the
PPC show?
• At point A, 16 million units of consumer goods are produced
and zero capitalgoods.
• At point D,8 million units of capitalgoods can be produced
and zero consumer goods.
• At point B,a combination of 14 million units of consumer
goods and 4 million units of capitalgoods can be
produced.
• At point C,a combination of 8 million units of consumer goods and 7
million units of capitalgoods can be produced.
• At point F,a combination of 8 million units of consumer goods and 4
million units of capitalgoods can be produced. At this point,not all
resources in the country are being used - there are unemployed
resources.Thisis because point F isinside the PPC.A country should
aim to push production so thatit is on the PPC.At points A , B,C and
D resources are fully employed.
• The combination of goods represented by point Eis not possible.
This is because it is outside the PPC. The country does not have
the resources to produce 12 million units of consumer goods and 7
million units of capital goods.
For example,what happensit the eoonomy in FigLWe t.6moves from B to
C? By moving aloog the Pl'C,anopportunity costis incurred.At point B.14
millionunits ot 00<1S<Jme< goods ambeing producedand 4 million units ot
capital goods.By moving to C.the production of capitalgoods rises to 7
lion units but
production of oonsome<goods falls to 8 minionunits.To gainanother 3
millionunits of cap(tal goods, 6 million units ot consumer goods ate oo;ng
sacrilieed. The lost production of OOt\SUme< goodS (6 millionunits)is the
opportunity cost
The choice between different combinations of consumer goods and
capital goods is an important one for a country.If a country produces
morecapital goods,it will probably be able to produce mOJe consumer
gOOds in the future. This is because capitalgoods afe used to
pfoduce consumer goods.Howevef, by doing so therewill be fewe<
consumer goods today and some people will have ess in the short temi.
At a particu ar point ntime,a country cannot produce comb nations
of goods that le to the right of the PPC.Howeve<.over a long petiod
of t me. aneconomy wouk1expect to raise the productionof au
goods.Thisis called e-conomic growth.There are several reasons
for th s.
• New techno ogy.As time passes, new technology iS developed and thiS
benefits businesses.For example,new maehines suctl as
robOts,computers, telecommunications and theintefnet have been
used by businesses to help
increase poductive potential.New technology is usually faster and
more reliable inproduction and therefore more ootput can be
produced.
• Improved effic ency:Over time,resouroes are used
moreefficiently.New production methods,such as kaizen
(continuovs improvement) andlean product.ion (using fewer
resourcesin production),for example,have been devek>ped and
adopted. These moreefficient methodsreplace tho old ones and more
output canbe produced with fewer resources.
• Educat onand training:AA economy can boost the pr'Oductive
potential of a nation by educatingand tralnlng the population. A
country's economy becomes more productive as the proportion of
educated workers
increases.This iS because educated workers can more efficiently carry
out tasks that requ re reading and \witing
analysis,evaluation,communication and Cl'itical thinking. However,a
covntry has to find the 'right' balance between academJc and
vocational education.
• New resources:Some countries find new resoul'Ce:S that enable
them to produce m0<e.F0< example.in recent years.the USA
has rasedits productive potentialby producing m0<e oilthrough
tracking, Fracking
involves shooting a mixture of mostty waterand sand under
highpressure against rock untilit fractures or breaks.The sand fills
the fracture.forcing oil oot of the rock fonnation.fmci<ing now
provides the USA with around 50 pe< cent of its oilneeds.This is up
from just 2 per cent in 2000.
If countries can produce more,the PPC will shift outwards.Thisis
sho\vn in Figure 1.7.PPC, represents anorig nal PPC. while PPC2
ShO\VS a new PPC resulting from Improved effte
eocy.for example.Combinat ons of goods not previously possible
can now be enjoyed.To generate economic growth in
this way, a government needs to enst.1re that investment levels are
adequate. Economic growth is discussedin more detailin Chapter
25.
Pl'C,
i I
ii
8
0
0
Capital goods
A Figure 1.7 Eftect ol improvOO OKICiCncyon the PPC
Finally, it is poss ble f0< the PPC to shift inwards.This would
represent negative economic 9row1h,that is,where a country's
productive potent actually falts. It may be caused by resource
°'
depkttion:where a country runs out of a naturalresource.such as oil
coal.The productive potentialof a
coontry can also be reduced by weather patterns.F0< example.dry
weather might prevent some nations from meeting their
agriculturalproduction
targets.Economic growth in a particuar country might a so be
negative if large numbe<s of highly qualified,skilled and experienced \
Yorkers moved overseas. This mtght happen If these
workers cooldearn more money employed in another
country.Wars.conflict and natura1disasters might also result in
negative economic growth.
