MODULE NO.

: _3__ Teacher: Cristiano

Subject: ECONOMICS DATE: Jan 11 -Feb 17,2024

International School Parent’s Signature:_________

TOPIC: PRODUCTION POSSIBILITY CURVE

LEARNING OBJECTIVES: Students should be able to explain ( identify/outline)

 nature and meaning of a production possibility curve (PPC)

 shape of the PPC: constant and increasing opportunity costs
 causes and consequences of shifts in a PPC
 significance of a position within a PPC

RESOURCES: Cambridge AS and A level Economics by Colin Bamford & Susan

Grant

PRODUCTION POSSIBILITY CURVE (PPC)

Production possibility curve: a simple representation of the maximum level of output
that an economy can achieve when using its existing resources in full.
-what is produced is determined by the quantity and quality of resources that are
available. In high-income economies, for example, many thousands of goods and
services are produced as a result of the wide availability of factors of production.
Low-income economies have fewer resources and the quality of resources is poorer.
As a result, in low-income economies fewer goods and services are produced and
there is less variety of production.

How the production possibility curve works

To understand how the production possibility curve works, imagine that the economy
produces just two goods, say cars and televisions. These two industries use all of
the economy’s current resources between them in their production of cars and

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 televisions. The production technology available is being fully utilised. The PPC
shows the maximum level of output of each of the two goods that can be produced.
The PPC is sometimes called the production possibility frontier since it draws a type
of boundary between what can be produced and what cannot be produced

significance of position within a PPC

Point C Point C is within the production possibility curve and at this point, only 250
cars and 500 televisions are being produced. This is an inefficient allocation of
resources since the economy is producing less than it could from the resources
available. This applies to any other points that are located within the production
possibility curve.

Point A and B – any point along the PPC indicate attainable and efficient
production. This means that an economy is employing all its resources in full.

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Point D –point D is outside the production possibility curve. Point D is not a possible
outcome since the economy does not have the resources that are required to
achieve this level of output of both types of good. Therefore, point D represents a
position of scarcity.

The production possibility curve and opportunity cost

Shapes of PPC
1. Increasing Opportunity Cost

When the PPC is curved outwards as shown above, opportunity cost changes as
the economy moves from one point to another on the production possibility frontier.
For each additional unit of Y produced, the opportunity cost of producing Y gets
larger and larger as the production of X decreases. This is a situation of increasing
opportunity costs. The two goods require different factors of production..

2. Constant Opportunity Cost

When the PPC is a straight line as shown above, opportunity costs do not change as
the economy moves from one point to another on the PPC. Constant opportunity

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costs are due to the factors of production being equally well suited to the production
of both goods. For this to occur, goods require the same factors of production, for
example, where two similar types of sports trainers are being produced.

Movements along the PPC ( Trade offs)

Look on the diagram above. The production possibility curve can be used to show
the trade-off involved in the production of the two products. A trade-off is the
process of deciding whether to give up some of one good in order to obtain more of
another. So, if it is decided that more televisions are to be produced, the trade-off is
that, as current resources are being fully used, fewer cars can be produced. The
numerical extent of any trade-off can be obtained from comparing the increase or
decrease in production for each of the two goods. So, the trade-off for producing 300
more televisions is the loss of 200 cars.

We should also note that for this to happen we need to switch our resources from
one use to another. Resources have to be switched from producing CARS to
producing TELEVISIONS and vice versa. This is known as the reallocation of
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resources and in the real world, as we decide to change the composition of our
output, we need to consider the costs of reallocating resources between uses. These
include the costs of retraining the workforce in the skills required to produce different
types of goods and services. This might take a long time and might only be possible
as new entrants to the labour force are trained in new skills. The extent to which
resources can be reallocated from one line of production to another is known as
factor mobility and, if we want resources to be swiftly allocated to the new use, we
have to ensure that factors are as mobile as possible.

Shifts of the PPC

A production possibility curve is drawn on the assumption that the quantity and
quality of resources and the state of technology are fixed. Through time, of course,
economies can gain or lose resources; the quality of resources and the state of
technical knowledge can also change. Such changes will shift the production
possibility curve to a new position.

There are two main reasons why shifts occur:

• More resources become available. The productive capacity of an economy
increases when more resources become available or when there is an improvement
in the quality of resources used. Such a change can come about through an increase
in the factors of production, for example more labour through immigration, an
increase in capital goods or improved opportunities for enterprise. Normally,
economies acquire more resources, although overpopulation can result in fewer
resources being available (a decrease in productive capacity).

• There is a technological change. Advances in technology continue over time and

affect the position of the production possibility curve of an economy. Where the
overall change is positive, then more of both products can be produced. This is the
normal situation in most economies. There are certain circumstances though where
technological progress may fall, resulting in a decrease in the production of both
products.

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The diagram (a) shows a situation in which the production possibilities available to
an economy have expanded. This is known as economic growth. This could be due
to an increase in the quantity and/or the quality of resources available to the
economy or an advance in the state of technology. Here the changes have improved
the economy’s ability to produce both good A and good B

However, on the diagram above, only the ability to produce agricultural products has
been improved. This could perhaps be because there has been a technological
breakthrough in producing agricultural products, which does not apply to the

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production of manufactured products. economy’s production possibilities have
improved and the curve has shift ed outwards from the origin.

Using the production possibility curve to show choices

Production possibility curves can be used to show the difficult choices that have to
be made by many low-income economies. Scarce resources need to be allocated to
meeting present needs at the expense of investing in a range of capital goods that
will increase economic potential in the longer term.
-The diagram below reveals the problem many low-income economies have to face.
The production possibility curve shows the production of consumer goods is
approaching its maximum, leaving only a small amount of resources for capital
goods. With only a small allocation, new investment in capital goods is often at best
only to replace existing resources. What is needed to raise economic potential is that
a greater proportion of resources should be given to capital goods in order to shift
the production possibility curve outwards. A small reduction in the amount of
consumer goods produced from A to B can produce a greater relative increase in the
amount of capital goods from C to D. The effect of this is to increase the economy’s
potential for economic growth as shown by an outward shift of the production
possibility curve.

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EXAM-STYLE QUESTIONS: MULTIPLE CHOICE
1 A production possibility curve is drawn on the assumption that:
A there are always opportunities to produce more of one good.
B all existing resources are being used and there is a given state of technology.
C all existing resources are being used.
D production never takes place within or outside the production possibility curve.

2 A country produces at a new point within its production possibility curve when:
A new technology is being applied to increase production.
B there is an increase in capital investment by firms.
C more is needed of one good and not the other good.
D there is a fall in unemployment.

3 An economy produces two goods: cars and smartphones. Why is the production
possibility frontier curved outwards from the origin?
A All resources are being fully used.
B The opportunity cost of producing cars or smartphones is constant.
C An increase in production of cars can only occur if there is a decrease in the
production of smartphones.
D Some of the economy’s resources are better suited to the production of cars, other
resources better suited to the production of smartphones.

4 An economy produces two goods: cars and smartphones. Its production possibility
curve shifts outwards. What would have caused this shift?
A the discovery of a new valuable oil reserve
B closure of an inefficient car assembly plant
C an increase in sales tax on cars and smartphones
D a fall in the rate of unemployment