ECONOMICS
CHAPTER : 4
PRODUCTION POSSIBILITY CURVE
DEFINITION :
Production Possibility Curve (PPC)
The Production Possibility Curve (PPC) represents the maximum combination of
goods and services which can be produced in an economy, That is the productive
capacity of the economy.
Production Possibility Diagram
The production possibility diagram is graphical representation of the maximum
combination of the amounts of goods and services that can be produced in an
economy, per period of time.
PRODUCTION POSSIBILITY
CURVE DIAGRAMS
01 02 03
Assume a country can only In the figure 4.1 if The opportunity cost of
produce two types of goods producers wish to increase producing the extra O1 to
: wooden furniture and production of olive oil from O2 liters of olive oil is
olive oil. It has a limited O1 to O2 then the amount therefore W1 to W2 tonnes
amount of land, labour and of wooden furniture of wooden furniture.
capital. manufactured will have to
decrease from W1 to W2.
The increased amount of olive
PPC
A oil is produced at the expense
E (opportunity cost ) of wooden
furniture.
W1 C
Wooden furniture
D
W2
O1 O2 B
Olive oil (liters)
• 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 liters of olive oil.
• Point D. - W2 tonnes of wooden furniture and O2 liters of olive oil are produced.
• Point E. - This point is beyond the production possibility curve and it 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.
MOVEMENT ALONG THE
CURVE :
CAUSES AND For a country to be in PPC two
CONSEQUENCES conditions have to be met:
OF SHIFTS AND
MOVEMENTS • All resources are used. - The is no
OF THE PPC unemployment of the 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
X
C more of one product, there must be less of
another product.
Producer goods
In the figure 4.2, a movement along the PPC
Y
from point X to point Y means more consumer
D
goods are produced (from A to B ), but at the
expense of fewer producer goods ( from C to
D ).
O
A B
Consumer goods
Figure 4.2 Movements along the PPC
SHIFT OF THE CURVE
For a country to shift its PPT outward, there must be economic growth. This can come
about in the following ways:
An increase in the quality of factors of production, 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.
Y Y
PPC 1
Goods
PPC 2
Goods
PPC 1 PPC2
O X
Services X o Services
Figure 4.3, An outward shift of the PPC Figure 4.4 An inward shift of the PPC
In the figure 4.3, economic growth causes an outward shift of the production possibility curve from PPC 1
to PPC 2 . This means the economy can produce more goods and services, without necessarily incurring an
opportunity cost.
Economies strive to increase the 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 off the PPC.
By contrast, detrimental changes scan cost 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 economies farmland,
factories and infrastructure. in this figure 4.4 the PPC ships inwards from PPC 1 to PPC 2 and represents a
decrease in the productive capacity of the economy .
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