PPC & Economic Growth (Cambridge (CIE) O Level Economics)

The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services

Any two goods/services can be used to demonstrate this model

Many PPC diagrams show capital goods and consumer goods on the axes

• Capital goods are assets that help a firm or nation produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good

• Consumer goods are end products and have no future productive use. For example, a watch

The use of PPC to depict the maximum productive potential of an economy

• The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production)

• At A, its resources are used to produce only consumer goods (300)

• At B, its resources are used to produce only capital goods (200)

• Points C and D both represent full (efficient) use of an economy's resources, as these points fall on the curve

  • At C, 150 capital goods and 120 consumer goods are produced

The use of PPC to depict opportunity cost

• To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)

• If this economy moves from point C (120, 150) to point D (225, 100), the opportunity cost of producing an additional 105 units of consumer goods is 50 capital goods

• A movement in the PPC occurs when there is any change in the allocation of existing resources within an economy, such as the movement from point C to D

The use of PPC to depict efficiency, inefficiency, attainable and unattainable production

• Producing at any point on the curve represents productive efficiency

• Any point inside the curve represents inefficiency (point E)

• Using the current level of resources available, attainable production is any point on or inside the curve and any point outside the curve is unattainable (point F) 

As opposed to a movement along the PPC described above, the entire PPC of an economy can shift inward or outward

Economic growth occurs when there is an increase in the productive potential of an economy

• This is demonstrated by an outward shift of the entire curve. More consumer goods and more capital goods can now be produced using all of the available resources

• This shift is caused by an increase in the quality or quantity of the available factors of production

  • One example of how the quality of a factor of production can be improved is through the impact of training and education on labour. An educated workforce is a more productive workforce and the production possibilities increase

  • One example of how the quantity of a factor of production can be increased is through a change in migration policies. If an economy allows more foreign workers to work productively in the economy, then production possibilities increase

Economic decline occurs when there is any impact on an economy that reduces the quantity or quality of the available factors of production

• One example of how this may happen is to consider how the Japanese tsunami of 2011 devastated the production possibilities of Japan for many years. It shifted their PPC inward and resulted in economic decline