Chapter 4: Production Possibility Curve

• Production Possibility Curve (PPC): shows the maximum combination of any two categories of goods and services that can be produced in an economy.
• Production Possibility Curve (PPC) Diagram: a graphical representation of the maximum combination of goods and services that can be produced in an economy.
• A: all resources are dedicated to the production of wooden furniture.

  B: all resources are dedicated to the production of olive oil.

  C: W1 tonnes of wooden furniture are produced along with O1 litres of olive oil.

  D: W2 tonnes of wooden furniture and O2 litres of olive oil are produced.

  E: this point is outside the productive capacity of the economy, so it is currently unattainable.

  F: this point is within the productive capacity of the economy, so production can increase without any opportunity cost as some factors of production are currently not being used.

  
• 2 conditions have to be met for a PPC:

  » All resources are used — there is no unemployment of 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 curve results in an opportunity cost, as to produce more of a product, there must be less of another product.
• Causes of PPC shifting inwards:

  » Decrease in quality of factors of production (less skilled labour achieved through less investments in education, research and training)

  » Decrease in the quantity of factors of production, such as the net migration of labour in a country decreasing.
• Causes of PPC shifting outwards:

  » Land: new discoveries of resources -> increase in capacity of economy + give workers more input to work with -> increase production capacity

  » Labour: more individuals with more skills -> better quantity and quality of products

  » Capital: latest technology -> increase productivity

  » Technology: improvements -> more productivity with same inputs