What this lesson teaches
I can use a production possibility curve to show scarcity, opportunity cost, efficiency, unemployment and growth.
Syllabus 8843, 1.1.1(e). Scarcity, choice and resource allocation: Production Possibility Curve (PPC) can be used to illustrate scarcity, choice, opportunity cost, productive efficiency, full employment, unemployment or under-utilisation of economic resources and changes in the productive capacity of an economy
Make a guess
Output rises 3% this year because laid-off workers find jobs again. Does the PPC shift outward?
- Yes. Any rise in output shifts the curve out.
- Yes. More people working means more resources.
- No. The economy moves towards its existing curve.
Show the answer
No. The economy moves towards its existing curve.
The workers were already part of the economy's resources. Using idle resources moves the point outward, but capacity is unchanged, so the curve stays put.
Moving from inside to the PPC uses idle resources; shifting the PPC out raises capacity.
Output can rise in two different ways, and they look different on a PPC.
If unemployed workers and idle factories are put back to work, the economy moves from a point inside the PPC towards the curve. Capacity has not changed.
If the economy gains more or better resources, such as more workers, more capital or better technology, the whole PPC shifts outward. This is an increase in productive capacity, and it allows long-run growth.
The PPC shifts inward if resources are lost, for example if a war destroys factories or a shrinking workforce is not replaced.
Sort these
Sort each event by what it does on a country's PPC.
Groups: A move towards the PPC, The PPC shifts out, The PPC shifts in.
- A recession ends and idle factories reopen.
- The workforce shrinks as people retire and few join.
- Thousands of workers finish a SkillsFuture course.
- A flood destroys factories and port equipment.
- Jobless graduates find work as the economy recovers.
- Firms install robots that raise output per worker.
Show the answer
A move towards the PPC
- A recession ends and idle factories reopen. The factories already existed. Using them again raises output without changing capacity.
- Jobless graduates find work as the economy recovers. These workers were already counted in the labour force, so capacity was there all along.
The PPC shifts out
- Thousands of workers finish a SkillsFuture course. More skilled workers can produce more with the same hours, which raises capacity.
- Firms install robots that raise output per worker. Better capital and technology raise what the economy can make at full use, so capacity rises.
The PPC shifts in
- The workforce shrinks as people retire and few join. Fewer workers means less capacity unless technology or more capital makes up for it.
- A flood destroys factories and port equipment. Capital is lost, so even at full use the economy can make less than before.
- Inside to PPC
- Uses idle resources.
- Outward shift
- More or better resources, or better technology.
- Inward shift
- Resources lost.
Worked example: Three changes in Singapore
Consider three separate events.
- A recession ends and idle factories reopen: a move from inside the PPC towards it.
- Firms adopt automation and AI, raising output per worker: the PPC shifts out.
- An ageing workforce shrinks and is not replaced by more workers or technology: the PPC shifts in.
Watch out for this
Any rise in output means the PPC has shifted outward.
If output rises because idle resources return to work, the economy moves towards the existing PPC. Only a rise in capacity shifts the curve.
Check your understanding
Which event shifts a country's PPC outward?
- Workers gain new skills through programmes such as SkillsFuture, so each can produce more.
- Firms switch from making consumer goods to capital goods.
- Unemployed workers find jobs, so the economy produces more goods and services.
Show the answer
Workers gain new skills through programmes such as SkillsFuture, so each can produce more.
Right. Better-skilled workers raise productive capacity, so the whole curve shifts out.