What this lesson teaches
I can use a production possibility curve to show scarcity, opportunity cost, efficiency, unemployment and growth.
Syllabus 9570, 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
During a recession, factories stand idle and many workers lose their jobs. Where is the economy now on its PPC diagram?
- Nowhere, because the curve itself shifts inward.
- Outside the curve, because the economy is in trouble.
- Inside the curve, because resources are unemployed.
- On the curve, but at a point with fewer goods.
Show the answer
Inside the curve, because resources are unemployed.
Idle factories and jobless workers mean the economy makes less than it could. It could raise output of both goods without giving anything up.
A PPC shows the most an economy can produce of two goods with its resources and technology.
A production possibility curve (PPC) shows the maximum combinations of two goods an economy can produce when it uses all its resources efficiently, with its current technology.
A point on the curve is productively efficient: to make more of one good, you must make less of the other.
A point inside the curve means resources are unemployed or used inefficiently. A point outside the curve cannot be reached with current resources.
The PPC is usually bowed out (concave). This is because resources are not equally good at producing both goods, so opportunity cost rises as you produce more of one.
- On the PPC
- Productively efficient.
- Inside
- Unemployed or wasted resources.
- Outside
- Not attainable now.
Worked example: Capital goods versus consumer goods
An economy can make capital goods (machines, buildings) and consumer goods (food, clothes).
- At A, it uses all its resources and makes a mix of both.
- At B, during a recession, factories stand idle and workers are unemployed: output of both is lower than it could be.
- C is out of reach now, but could become possible if the economy grows.
Watch out for this
A point inside the PPC means the economy has chosen to produce less.
A point inside means resources are unemployed or used inefficiently. The economy could produce more of both goods.
Check your understanding
An economy is producing at a point inside its PPC. What does this show?
- The economy is producing the best possible combination.
- The economy is producing beyond its capacity.
- Some resources are unemployed or used inefficiently.
Show the answer
Some resources are unemployed or used inefficiently.
Right. It could produce more of both goods with the resources it already has.