Production Possibilities Curve & Economic Growth

• Production Possibilities Curve (PPC)

  A graph showing all the possible output combinations of two goods that an economy is able to produce by fully utilizing the available limited resources using the available technology
• PPC


  • Illustrates how an economy makes a choice between the goods to be produced as a result of scarcity
  • Represents the limits on production of various combinations of goods and services
  • A model designed to illustrate what combinations of output an economy could possibly choose
• Assumptions underlying the PPC

  • Two alternative goods
  • Full employment of resources
  • Fixed number of resources and technology
• Unemployment of resources


  Existing of idle resources or resources not being used in the production of goods and services
• Underemployment of resources


  Situation whereby the resources are employed but not being used up to their full potential
• The most efficient production point is anywhere on the PPC curve itself, where the economy is using all its available resources up to their full capacity
• Production Possibilities Table


  • 0 kg rice, 100 pairs shoes
  • 35 kg rice, 80 pairs shoes
  • 60 kg rice, 60 pairs shoes
  • 80 kg rice, 40 pairs shoes
  • 95 kg rice, 20 pairs shoes
  • 100 kg rice, 0 pairs shoes
• Bowed Outward PPC


  Represents increasing opportunity costs
• Law of Increasing Opportunity Costs

  1. The opportunity cost of producing an additional unit of a good increases as more of the good is produced

  2. Businesses need to sacrifice more of the alternative good to produce an additional unit of the first good
• Sources of Economic Growth
• Opportunity cost


  The cost of the chosen outcome - The cost of the foregone outcome
• Calculating opportunity cost


  Opportunity cost = The cost of the chosen outcome - The cost of the foregone outcome
• As the economy produces more rice

  The opportunity cost of producing rice increases
• Law of increasing opportunity cost


  The opportunity cost of producing an additional unit of a good increases as more of the good is produced
• Production possibility curve (PPC)


  Shows all different attainable combinations of the production of two commodities that can be produced in an economy given the resources and technology which are constant and fully utilized
• To achieve any point beyond the PPC

  There is a need for increase in the present supply of resources and technology which leads to an outward shift in the PPC as overall production increases, resulting in economic growth
• Economic growth


  The condition when the economy can increase the production of all goods and services in the economy over time
• Factors that can lead to economic growth

  • Increase in the quantity of resources
  • Increase in the quality of resources
  • Improvement in technology
  • Improvement in human capital
• Increase in the quantity of resources can come from population increase or labour force participation
• Investment in factories, equipment, and structures adds to the capital stock in the economy, enabling the economy to produce more of both capital and consumption goods in the future
• Improvement in technology helps producers increase production of goods and services with the same number of resources, making the production process quicker and more efficient
• Upgrading human capital can increase the productivity of labour, leading to an increase in the production of goods and services
• Production Possibilities Curve (PPC)

  Graph showing all the possible output combinations of two goods that an economy is able to produce by fully utilizing the available limited resources using the available technology
• The PPC is simply a model designed to illustrate what combinations of output an economy could possibly choose
• Assumptions underlying the PPC

  • Two alternative goods
  • Full employment of resources
  • Fixed amount of resources and technology
• PPC


  • The economy can produce at any point on the curve (as illustrated by points D, E, F) or inside the curve (at point I)
  • When the economy is producing at point I, the resources are not fully utilized or inefficient
  • The economy cannot produce outside the curve (at point U) with the current level of resources and technology
• Types of inefficiency when the economy produces in PPC

  • Unemployment of resources
  • Underemployment of resources
• Unemployment


  The events when the resources are not used at all to produce goods and services
• Underemployment


  A situation when the resources are used below their full capacity
• As more and more of one good is produced

  The economy must sacrifice an ever-increasing amount of the alternative good
• Law of increasing opportunity cost


  The opportunity cost of producing an additional unit of a good increases as more of the good is produced
• Resources are not equally efficient in both productions
• Resources cannot easily be switched (adapted) from one production to another
• The resources are not perfect substitutes to each other
• Changes in the amount of resources or technology

  Affect the entire production possibilities curve
• Economic growth


  The condition when the economy is able to increase the production of all goods and services in the economy overtime
• Sources of economic growth

  • Increase in quantity of resources
  • Increase in quality of resources
• Increase in quantity of resources

  • Increase in population
  • Labor force participation
  • Investment of capital goods
• Increase in quality of resources

  • Improvement in technologies
  • Improvement in human capital