Production possibility curve

(PPC)
1.4
Objectives

 A01 – know the definition of a PPC and understand how a PPC is able to demonstrate the
efficiency of production
 A02 – be able to use the PPC to demonstrate the concept of opportunity cost
 A03 – be able to evaluate where on the PPC individual countries are likely to be
producing.
Key terms

 PPC – also known as the PPF (production possibility frontier) shows the maximum possible output combinations of
two goods or services an economy can achieve when all resources are fully and efficiently employed.
 Productivity – factor input/output. Labour hours/output (units) = the number of products made for each hour of labour.
 Consumption expenditure – short-term benefits to consumers. Food and fuel.
 Capital expenditure – long-term benefits to consumers. Education and healthcare.
 Subsidy – is a benefit given by the government to an individual or business reducing the price of production and/or
consumption
 Necessities – goods needed for people to survive such as basic foods and accommodation.
 Factor resources – four factors of production – total factor input
 Natural rate of unemployment – is the unemployment rate that persists in a well-functioning, healthy economy that is
considered to be at “full employment”. At the rate of pay offered some people may choose not to work. Other workers
may be between jobs.
PPC/PPF diagram for the firm
Shift of PPC
Points under, on and beyond the PPC

1. Point under the PPC is where the firm is not using all of the resources available or they
are not being used at the most efficient level. So, there may be unemployed workers.
Unused relevant land resources. Better capital equipment available.
2. Point on the PPC is where the firm is using all of the resources efficiently. There is no
unemployment of labour. All land (materials) available is being used efficiently. The best
capital equipment is used in the production process.
3. Point beyond the PPC is unobtainable for the moment. An increase in factor resources or
an increase in productivity would enable a movement beyond the PPC
Draw a PPC and show the following

 1. What would have to happen for an economy to produce the maximum

possible quantity of economic goods?
 2. What would happen to the quantity produced if some resources became
unemployed?
 3. What would happen if new resources were discovered? What would happen
if there was a natural disaster (e.g. earthquake?)
Opportunity cost
Why is a PPC curved?
PPC for an economy
PPC and consumer and capital goods

 If an economy decided to produce only capital goods for a six-month period – what would
happen now and in twelve months’ time to the quantity of consumer goods produced?
PPC for an economy

 Consumption goods – goods which have short-term benefits and so benefit the
economy in the short-term – subsidizing fuel or rice. No outward shift of the
PPC.

 Capital goods – goods which have long-term benefits and so benefit the
economy in the long-term – expenditure on technology, education,
infrastructure and healthcare. Outward shift of the PPC.
Government decisions

 The government of a poor country spent 64% of its taxation revenue on subsidies for
basic necessities reducing the price of rent, rice and fuel. Unemployment of labour is
15.5%.
 The government of a rich country spent 78% of its taxation revenue on technology and
education. Unemployment of labour is 3% (natural rate of unemployment).
 Draw the PPCs for the poor and the rich countries using consumption and capital
expenditures on the Y and X axis. Show the current points of production.
 Explain why one country has focused on consumption expenditure and the other on
capital expenditure. What do you think might happen to the PPC curve for the two
countries in say five to ten years time? Draw the new PPCs.
Past exam questions

Firms use different quantities of land, labour, capital and enterprise in producing their
products. The ways in which a country’s resources can be used, and the extent to which they
are employed, can be shown on a production possibility diagram.

c) Analyse, using a production possibility diagram, the effect on an economy’s output when
there is a change from full employment to unemployment. [6]
Key terms - review

 PPC
 Productivity
 Consumption expenditure
 Capital expenditure
 Subsidy
 Necessities
 Factor resources
 Natural rate of unemployment
Objectives

 A01 – know the definition of a PPC and understand how a PPC is able to demonstrate the
efficiency of production
 A02 – be able to use the PPC to demonstrate the concept of opportunity cost
 A03 – be able to evaluate where on the PPC individual countries are likely to be
producing.