What this lesson teaches
I can define a production possibility curve and draw and read one.
Syllabus K343, 1.4.1. Production possibility curves (PPC): definition; drawing and interpretation of the PPC diagram
I can explain what a point under, on or beyond a PPC means.
Syllabus K343, 1.4.2. Points under, on and beyond a PPC: the significance of the location of different production points
Make a guess
During a recession, many factories stand idle. Where is the economy on its PPC diagram?
- Inside the curve.
- On the curve, at a lower point.
- Outside the curve.
Show the answer
Inside the curve.
Idle factories mean resources are unemployed. The economy could make more of both goods without giving anything up.
A PPC shows the maximum combinations of two goods an economy can make with all its resources.
A production possibility curve (PPC) shows the most an economy can make of two goods. It assumes all resources are used fully and efficiently. It also assumes technology stays the same.
Points on the curve, such as A and B, are attainable and efficient. All resources are employed and none are wasted. To make more of one good, the economy must make less of the other.
A point inside the curve, such as C, is attainable but inefficient. Some resources are unemployed, for example during a recession, or used badly. The economy could produce more of both goods.
A point outside the curve, such as D, is unattainable with current resources and technology. Reaching it would need more or better resources.
- PPC
- Maximum combinations of two goods with all resources used fully and efficiently.
- On the curve
- Efficient: all resources fully employed.
- Inside
- Inefficient: unemployed or wasted resources.
- Outside
- Unattainable with current resources and technology.
Worked example: Reading a PPC in an answer
A question shows a PPC with point C inside the curve and asks what C shows.
- Locate the point: C is inside the PPC.
- State the meaning: the economy is not using all its resources fully or efficiently.
- Give a cause: unemployment of workers or idle machines, as in a recession.
- Give the consequence: output of both goods could rise without giving up either, by moving towards the curve.
Watch out for this
A point inside the PPC means the economy has reached its limit.
The limit is the curve itself. A point inside means resources are being wasted, so the economy could produce more of both goods.
Check your understanding
Which point on a PPC diagram cannot be reached with the economy's current resources?
- A point outside the curve, beyond what resources allow.
- A point on the curve, where every resource is fully used.
- A point inside the curve, where some resources sit idle.
Show the answer
A point outside the curve, beyond what resources allow.
Right. Points outside the curve need more resources or better technology than the economy has now.
Check your understanding
An economy is producing at a point inside its production possibility curve. What does this show?
- The economy cannot reach this point with its resources
- The economy is producing the most it can
- More of one good can only come from less of the other
- Some resources are unemployed or used inefficiently
Show the answer
Some resources are unemployed or used inefficiently
Right. With full and efficient use of resources the economy could reach the curve.