What this lesson teaches
I can explain what shifts a PPC and what the shift means for an economy's growth.
Syllabus K343, 1.4.4. Shifts of a PPC: causes and consequences of shifts of a PPC in terms of an economy's growth.
Make a guess
Unemployed workers find jobs and output rises 3%. Does the PPC shift outwards?
- Yes, because more people are working.
- No. The economy moves towards its existing curve.
- Yes. Any rise in output shifts the PPC outwards.
Show the answer
No. The economy moves towards its existing curve.
The workers were already part of the economy's resources. Using them again raises output without raising capacity, so the curve stays put.
More or better resources shift the PPC outwards; losing resources shifts it inwards.
The PPC shifts outwards when the economy can make more than before. This happens when it gains more factors of production or better ones: more workers, new land, more machines, better training or better technology.
An outward shift is economic growth in what the economy is able to produce. Points that were out of reach can now be reached. Living standards can rise because more goods and services are possible.
The PPC shifts inwards when the economy can make less. Causes include a flood that destroys factories, a war, skilled workers leaving the country, or natural resources running out.
A shift only shows what an economy can make. It does not show what it does make. With high unemployment, an economy can produce inside even a new, larger curve.
- Outward shift
- More or better factors of production: economic growth in potential output.
- Inward shift
- Loss of factors, such as disaster, war or emigration.
- Shift vs movement
- A shift changes capacity; a movement changes the mix of output.
Worked example: Explaining a shift with a cause and a consequence
A question asks how investment in new technology affects a country's PPC.
- Cause: new technology raises the quality of capital, so each worker and machine produces more.
- Diagram: the PPC shifts outwards from PPC0 to PPC1.
- Consequence: the economy can produce more of both goods, so potential output and living standards can rise.
- Limit: the gain is only realised if the new capacity is actually used, with low unemployment.
Watch out for this
Any rise in output shifts the PPC outwards.
Output can rise by moving from a point inside the curve towards it, for example when unemployed workers find jobs. The curve itself only shifts when productive capacity changes.
Check your understanding
Which event is most likely to shift a country's PPC inwards?
- Unemployment rises during a recession.
- A flood destroys many factories and farms.
- The government spends more on education.
Show the answer
A flood destroys many factories and farms.
Right. Losing capital and land reduces productive capacity.
Check your understanding
Which change would shift a country's production possibility curve outwards?
- A flood destroys many factories
- More skilled workers arrive from abroad
- Unemployed workers find jobs
- Resources move from consumer goods to machines
Show the answer
More skilled workers arrive from abroad
Right. More resources let the economy produce more of both goods, so the whole curve moves out.