PPC & Classification of goods

Review (PPC) : Shape

• 1. Concave PPC: shows an increase opportunity cost
• for each additional unit of good B that is produced, the opportunity cost, gets larger and larger as
good B production increases.

• Reason: This happens because of specialisation of

factors of production, which makes them not
equally suitable for the production of different
goods and services.

• Explain: As production switches from good A to

more good B, it is necessary to give up increasingly
more good A for each extra unit of good B
produced, because factors of production suited to
good A production will be less suited to good B
production.
Review (PPC) : Shape
• 2. Constant curve: constant opportunity cost
• By contrast, when the PPC is a straight line , opportunity costs are constant (do not change) as the
economy moves from one point of the PPC to another.

• Reason: Constant opportunity costs arise when the

factors of production are equally well suited to the
production of both goods

• Explain: such as in the case of basketballs and

volleyballs, which are very similar to each other,
therefore needing similarly specialised factors of
production to produce them. As we can see in graph, for
each additional unit of volleyballs produced, the
opportunity cost, or sacrifice of basketballs, does not
change.
Review (PPC) : Shape
• Convex PPC: decrease opportunity cost
Review (PPC):Points

On the curve(A,B): efficient, with all

resources are fully used.
Below the curve: not efficient
Beyond the curve: not feasible
 • Reasons: increase & improve in quantity & quality of

Review (PPC): Shift

FOP
• 1. Quantity:
• More labour. exaple: immigration, increase in
Output increase, PPC curve shift to the right. population
Economic contraction: PPC curve shift to the • More land. for example,an increase in the natural
left. resources available to an economy,such as the
discovery of more oil.
• More capital. for example,due to businesses increase
investment.
• 2. Quality
• Land : technology, for example can be made more
productive by using fertilisers to increase the output
from farming land.
• Labour: Education and training & healthcare improve
the quality of labour and makeit more productive.
• Capital: Improvements in technology increase the
quality of capital.
• Entrepreneurs: Education, tranning, healthcare, can
become more skilled through education to manage the
other factors of production in a more efficient way
Production possibility curves/ Frontier essay structure

1. How to use PPC to show opportunity cost?

Explain, with the help of diagrams, how (i) constant and (ii) increasing opportunity costs
determine the shape of an economy’s production possibility curve. [8]
9708 June 2019 Paper 21 Question 2 a

2. How to use PPC to show scarcity ？

Show how the economic problem can be explained with the use of a production
possibility curve. [8]
9708 Nov 2014 Paper 23 Question 2 a

3. How to use PPC to show economic growth?

Discuss whether enterprise is crucial to the outward shift of the

 How to use PPC to show opportunity cost
• Example: • In a concave PPC curve, it shows an increase opportunity cost. For
example, from the diagram we can see, at point A with all resources &
technology are fully used, the economy can produce 250 units of good A
Good A and 100 units of good B. At point B, with all resources & technology are
full used, the economy can produce 200 units of good A and 200 units of
250 A good B. When moving from point A to point B, to produce 100 more units
B of good B, the economy give up 50 units of Good A. So the opportunity
200 C
130 cost of moving from point A to B will be 50 units of Good A. At Point C,
the economy could produce 130 units of good A & 300 units of good B.
When moving from point B to C, to produce 100 more units of good B, the
economy give up 70 units of good A, So the opportunity cost of moving
from point B to point C will be 70 Units of Good A. As 70 units of good A
>50 units of good A, a concave PPC curve shows an increasing opportunity
cost, or we said that or each additional unit of good B that is produced,
100 200 300 Good B
the opportunity cost, gets larger and larger as good B production
[Link] happens because of specialisation of factors of production,
which makes them not equally suitable for the production of different
goods and services.
 How to use PPC to show scarcity
• 1. The condition of scarcity does not allow the economy to
produce outside its PPC. With its fixed quantity and quality
of resources and technology, the economy cannot move to
any point outside the PPC, because it does not have enough
resources (there is resource scarcity). (D)
• 2. The condition of scarcity forces the economy to make a
choice about what particular combination of goods it wishes
to [Link] it could achieve full employment and
productive efficiency, it must decide at which particular
point on the PPC it wishes to produce. (A, B)
• 3. The condition of scarcity means that choices involve
opportunity costs. If the economy were at any point on the
curve, it would be impossible to increase the quantity
produced of one good without decreasing the quantity
including: definition fo scarcity & opportunity cost produced of the other good. In other words, when an
because of scarcity, people must make choice, economy increases its production of one good, there must
which will cause opportunity cost. necessarily be a sacrifice of some quantity of the other
good; this sacrifice is the opportunity cost (A to B)
 How to use PPC to show economic growth
(Micro) As the quantity & quality of facotrs of production being increase &
improve , economy’s output increase, and result in an economic
Goods A
growth. From the diagram we can see as output increase, PPC
curve will shift from PPC 1 to PPC 2, and point A will shift to point
B. At point A, with all resources & technology are fully used, the
economy can produce 220 units of good A and 180 units of good
B B. At point B, the economy can produce 250 units of good A and
250
200 units of good B. When the production posibilities shift form A
220 A to B, the economy could produce 50 more units of good A and 20
more units of good B. The output of the econom increase in both
good A & B. So it shows an economic growth.
+ why quantiy increase & what will improve quality of FOP
PPC1

180 200 Goods B

Example question: Use production possibility curve (PPC) diagrams to explain the effect on an economy’s
output of (i) increased use of its existing labour, and(ii) an increased availability of natural resources.
 How to use PPC to show economic growth
(Marco)
• definition of economic growth: increase in output
• 1. short-run/actural economic growth (increase in quantity of FOP)
example:
as aggregate demand increase, more resources are used in production. As
acutral output increase, which will cause an economic growth. From the
diagram we can see, as more spare capacity are used in production,
production posibilities move from point A to point B. At point A, the economy
could produce 100 units of good A and 40 units of good B. At point B, the
150 economy could produce 150 units of good A and 80 units of good B. When
moving from point A to B, there is no opportunity cost and the total output of
100 the economy increase, which shows an economic growth.
This kind of economic growth due to an increase in quantity of factors of
production. For examples, due to immigration and increase in population, the
40 80 quantity of labour will increase. Also,
an increase in the natural resources available to an economy,such as the
discovery of more oil, will increase the quantity of land. Whats more, an
increase in investment will bring more capital to the economy
 How to use PPC to show economic growth
(Marco)
• 2. Long-run/ potential economic growth (improve in quality of FOPs)

Goods A As productivity increase, which will cause potential output

increase, and result in an potential economic growth. From the
diagram we can see as productivity increase, PPC curve will shift
from PPC 1 to PPC 2, and point A will shift to point B. At point A,
with all resources & technology are fully used, the economy can
B
250 produce 220 units of good A and 180 units of good B. At point B,
the economy can produce 250 units of good A and 200 units of
220 A good B. When the production posibilities shift form A to B, the
economy could produce 50 more units of good A and 20 more
units of good B. The output of the econom increase in both good
PPC2 A & B. So it shows an economic growth.
PPC1
This outward shift caused by an improve in quality of Factors of
180 200 Goods B production. For example, as the development of technology, the
quality of land and capital improve. Also, with better education &
trainning, the quality of labour and enterprinuers will improved.
Review (Classification of goods)
• Free goods: a good that has no opportunity cost
• Economic good: a good or service that has a benefit (utility) to society. Also, economic goods have a
degree of scarcity and therefore an opportunity cost.
• Private goods: consumed by someone and not available to anyone else.
-Excludability: where it is possible to exclude one from consumption
-Rivalry: where consumption by one person reduces availability for others
• Public good:
one that is non-excludable and non-rival and for which it is usually difficult to charge a direct
price.
• Quasi-public good:
goods that have some but not all of the characteristics of public goods.
Review (public goods)
• [Link]-rival: as more consume, the benefit to those already consuming is not diminished.
• Example: In the village example, however, if one person has their house protected from
flooding it does not stop other people from having their houses protected as well. There is
no rivalry and everyone can enjoy the benefit of the public good at the same time.
• 2. Non-excludable: where it is not possible to stop all benefiting from consumption.
• Example: The people in the village who have not paid towards the building of the flood
defences cannot be excluded from benefiting from them and will still enjoy protection from
flooding
• Free rider problem: when people can enjoy the use of a good without paying for it.
Because of non-excludable
• explain:a non-excludable good were to be produced by a private firm, people could not be
prevented from using it even though they would not pay for it. Yet no profit maximising
firm would be willing to produce a good it cannot sell at some price
 Review (Classification of goods)
• Merit good
• possitive externalities
• a lack of information on external benefit to the society when consuming/ producing the product
• Undercosumed/ underproduction relative to the social optimum level.
• example: education, healthcare

P1 D2

D1
Q1
Review (Classification of goods)
• Demerit good
• nagitive externalities
• a lack of information (information failure) on external cost to the society when consuming or
producing the product.
• it is overconsumed/overproduction relative to the social optimum level of consumption.
• example: cigarettes

P1
D1

D2
Q1
Essay Structure (Classification of goods)
1. Define different goods
Explain, with examples, the difference between a demerit good and a merit good. [8]
Explain the meaning of ‘public good’ and ‘private good’. [8]
Discuss whether national defence or a public park is the better example of a public
good. [12]

2. Differences & links of goods

Using examples, explain the difference between merit goods and public goods and show why it is
possible for profit to be made in the supply of one of these types of good but not the other. [8]

[Link]
Using examples, explain the difference between merit goods and public goods and show why it is
possible for profit to be made in the supply of one of these types of good but not the other. [8]
example: differences & links of goods
• Using examples, explain the difference between merit goods and
public goods and show why it is possible for profit to be made in the
supply of one of these types of good but not the other. [8]

• 1. definitions: merit goods & public goods + examples

• 2. explain what is a merit goods, using examples to explain (education,
healthcare). + why producing merit goods could earn profit: when it is
a private good, (diagrams or explainations)
• 3. explain what is public goods (non rival & non excludable), using
examples to explain (street light, national defence) + free rider
problem +examples .