Production possibility curve (PPC) | IGCSE Class 10 Economics Notes

This note covers the production possibility curve (PPC) as a diagram of choice and scarcity: what a PPC shows and how it is drawn, the meaning of points under, on and beyond the curve, movements along the curve and opportunity cost, and the causes and consequences of shifts in the PPC for an economy's growth.

What is a production possibility curve?

Defining the curve

A production possibility curve (PPC) is a diagram that shows the maximum possible combinations of two goods, or two categories of goods, that an economy can produce in a given time period, using all of its available factors of production as fully and efficiently as possible, with a fixed quantity and quality of resources and a fixed level of technology.

Because resources are scarce, no economy can produce an unlimited amount of everything, so the PPC is a direct picture of the economic problem of scarcity and choice.

What the axes show

The two axes of a PPC usually represent two broad types of output, most commonly capital goods (goods used to make other goods, such as machinery) on one axis and consumer goods (goods bought for immediate use, such as food or clothing) on the other.

Any point on or inside the line drawn between the two axes is a combination that the economy is able to produce; any point outside it cannot be produced with the resources and technology currently available.

Definition: production possibility curve. A curve showing the maximum combinations of two goods (or categories of goods) an economy can produce in a given period when all its resources are fully and efficiently employed.

How is a PPC diagram drawn and interpreted?

Drawing the curve

A PPC is normally drawn bowed outward from the origin, that is concave to the origin, rather than as a straight line.

The two end points on the axes show what would happen if the economy devoted all its resources to just one good, for example all resources to capital goods (the point on the vertical axis) or all resources to consumer goods (the point on the horizontal axis).

Points between these two extremes show the various combinations of the two goods that full and efficient use of resources could produce.

Why the curve is concave

The curve is drawn concave rather than straight because resources, particularly labour and capital, are not equally suited to producing both goods.

Some workers and machines are far better suited to making capital goods and others to making consumer goods, so as more and more resources are switched from one good to the other, each extra unit of the first good costs an increasing amount of the second good given up. This shape is the diagram's way of showing increasing opportunity cost.

(to draw) Draw a vertical axis labelled "capital goods" and a horizontal axis labelled "consumer goods".

Plot a curve bowed outward (concave to the origin) running from a point high on the vertical axis to a point far along the horizontal axis.

Mark a point on the curve as the current efficient combination, a point inside the curve as an inefficient or underemployed combination, and a point outside the curve as an unattainable combination.

What do points under, on and beyond the PPC mean?

The position of a production point relative to the PPC tells us a great deal about how an economy is performing.

Points on the curve

A point on the PPC shows productive efficiency: the economy is using all its resources, with no unemployed or underused factors of production. To produce more of one good, the economy must produce less of the other, because resources are already fully stretched.

Points inside the curve

A point under (inside) the PPC shows an economy that is not using its resources fully or efficiently. This could be because some labour or capital is unemployed, or because resources are being used in a wasteful or badly organised way. An economy at a point inside the curve could, in principle, increase its output of both goods at the same time simply by using its existing resources more fully, without needing any extra resources or new technology.

Points beyond the curve

A point beyond (outside) the PPC is unattainable with the economy's current resources and technology. It represents a combination of output that cannot currently be produced, however efficiently resources are organised. The only way to reach such a point is for the whole PPC itself to shift outward, which means the economy must grow.

This distinction matters because it separates two very different economic problems: moving from a point inside the curve to a point on the curve is about using existing resources better (closing a gap that already exists), while moving beyond the current curve is about increasing what the economy is capable of producing in the first place.

What happens during a movement along the PPC, and how does this relate to opportunity cost?

A movement along the PPC happens when an economy reallocates its existing resources between the two goods, while staying on the same curve.

The total quantity of resources and the level of technology do not change; what changes is how those resources are divided between producing the two goods.

For example, if a government decides to build more machinery, it may move resources such as workers and raw materials away from producing consumer goods and towards producing capital goods, sliding the production point along the curve towards the capital goods axis.

Opportunity cost is the value of the next best alternative that must be given up when a choice is made.

On a PPC, the opportunity cost of producing more of one good is the quantity of the other good that must be sacrificed, because all resources are already fully employed on the curve.

Any movement along the PPC therefore has an opportunity cost: more of one good can only be gained by giving up some of the other.

Because the curve is concave to the origin rather than a straight line, the PPC illustrates the law of increasing opportunity cost: the first few units of a good can often be produced by giving up only a small amount of the other good, because some resources are well suited to the new use.

As more and more resources are switched, however, progressively less suitable resources have to be used, so each extra unit of the good gained costs a larger and larger quantity of the other good given up.

Definition: opportunity cost. The value of the next best alternative forgone when a choice is made between competing uses of scarce resources.

(to draw) Using the same concave PPC as before, mark one point near the consumer goods axis and a second point further along the curve towards the capital goods axis.

Draw an arrow between the two points along the curve, and label the fall in consumer goods output as the opportunity cost of the rise in capital goods output.

A simple illustration of increasing opportunity cost

In this illustration, each successive move of 10 extra units of capital goods requires a larger sacrifice of consumer goods: 5, then 10, then 15, then 20 units. This rising sacrifice is exactly what the bowed, concave shape of a PPC is drawn to represent.

What causes a shift in the PPC?

A shift in the PPC is different from a movement along it: the whole curve itself moves to a new position, meaning the maximum amount the economy is capable of producing changes.

An outward shift (the curve moving further from the origin) means the economy's productive potential has increased; an inward shift (the curve moving closer to the origin) means its productive potential has fallen.

Causes of an outward shift

An outward shift, representing economic growth, can be caused by:

• an increase in the quantity of resources available, for example growth of the labour force through population increase or net inward migration, or the discovery of new natural resources;
• an increase in the quality of resources, for example a better-educated and better-trained workforce that is more productive, or an increase in the stock of capital goods through investment;
• improvements in technological progress, which allow the same quantity of resources to produce a greater output than before.

Causes of an inward shift

An inward shift, representing a fall in productive potential, can be caused by the opposite kinds of change, for example a natural disaster or war that destroys capital and reduces the labour force, a fall in the working population through emigration or disease, or the depletion of a natural resource such as a mineral deposit running out.

A shift can affect the whole curve, if the cause affects resources used in producing both goods, or it can pivot the curve on one axis, if the cause only affects the resources used to produce one of the two goods, for example a technological improvement that applies only to producing capital goods.

Definition: economic growth. An increase in the productive potential of an economy, shown on a PPC diagram as an outward shift of the whole curve.

(to draw) Draw the original concave PPC, then draw a second, larger concave curve further from the origin, roughly parallel to the first.

Shade the area between the two curves and label it "increase in productive potential (economic growth)". Mark a point beyond the original curve that now lies inside, or on, the new curve.

What are the consequences of a shift in the PPC for an economy's growth?

Realising the potential

An outward shift in the PPC means that combinations of output that were previously unattainable, lying beyond the original curve, now become possible. This represents an increase in the economy's potential output.

Whether this potential is actually achieved depends on whether the economy also moves its actual production point to make use of the new capacity; an outward shift on its own only shows what the economy is now capable of, not what it actually produces.

The growth trade-off

There is an important trade-off involved in achieving outward shifts. If an economy today chooses a production point closer to the capital goods axis, giving up some consumer goods now, it builds up more machinery, equipment and infrastructure.

This greater stock of capital goods tends to shift the PPC further outward in future periods, allowing higher output of both capital and consumer goods later.

Choosing a point closer to the consumer goods axis today means enjoying more consumption now, at the cost of a smaller outward shift, and therefore slower growth, in the future.

An inward shift reduces the economy's maximum possible output of both goods, meaning combinations that were previously attainable are no longer so. This can reduce living standards, since even full and efficient use of the now smaller stock of resources cannot reproduce the previous level of output.

Going beyond the syllabus

The PPC diagram is often used alongside other core economic ideas taught at this level. It can illustrate the basic economic problem of unlimited wants and limited resources, since any point chosen on the curve automatically means giving up some of the other good, which is exactly what scarcity and choice mean in practice.

It is also a useful way of comparing the growth performance of different economies over time, since an economy whose PPC shifts outward by a larger amount over a period has achieved faster economic growth than one whose PPC has shifted by a smaller amount, or has not shifted at all.

The PPC can also be linked to the choice between consumption and investment that every economy faces: a country that devotes more resources to capital goods today is, in effect, choosing future growth over present consumption, while a country that devotes more resources to consumer goods is choosing the opposite trade-off.

Finally, the diagram can be used to compare two different economies at the same point in time: if one country's PPC lies entirely outside another's, the first country has greater productive potential, though this alone does not show whether either country is actually producing efficiently on its own curve.

Glossary

• Production possibility curve — a diagram showing the maximum combinations of two goods an economy can produce with its existing resources and technology.
• Opportunity cost — the value of the next best alternative given up when a choice is made.
• Scarce resources — factors of production that are limited in supply relative to the unlimited wants they could satisfy.
• Factors of production — the resources (land, labour, capital, enterprise) used to produce goods and services.
• Capital goods — goods used to produce other goods, such as machinery and equipment.
• Consumer goods — goods bought for immediate use or consumption by households.
• Productive efficiency — a situation in which an economy produces on its PPC, using all resources fully and with no waste.
• Underemployed resources — resources, such as labour or capital, that are not being fully or efficiently used.
• Unattainable output — a combination of goods lying beyond the current PPC, which cannot be produced with existing resources and technology.
• Economic growth — an increase in an economy's productive potential, shown as an outward shift of the PPC.
• Technological progress — improvements in methods of production that allow more output from the same resources.
• Movement along a PPC — a change in the combination of goods produced by reallocating existing resources, without the curve itself shifting.
• Shift of a PPC — a change in the position of the whole curve, showing a change in the economy's maximum possible output.
• Concave curve — a curve bowed outward from the origin, used to show increasing opportunity cost on a PPC.
• Net inward migration — more people entering a country to live and work than leaving it, which can increase the labour force.

Common errors and misconceptions

• Misconception: a point inside the PPC is unattainable. Correct: a point inside the PPC is attainable but shows resources that are unemployed or used inefficiently; only points beyond the curve are unattainable.
• Misconception: a movement along the PPC and a shift of the PPC are the same thing. Correct: a movement along the curve reallocates existing resources between the two goods, while a shift moves the whole curve because the quantity or quality of resources, or technology, has changed.
• Misconception: the PPC is always drawn as a straight line. Correct: it is normally drawn concave to the origin, bowed outward, to show increasing opportunity cost as resources are reallocated.
• Misconception: any point on the PPC is equally desirable. Correct: all points on the curve are productively efficient, but which one is best depends on the economy's priorities, such as the balance between capital goods for the future and consumer goods for today.
• Misconception: an outward shift of the PPC automatically means the economy is actually producing more. Correct: an outward shift only shows an increase in potential output; the economy must also move its actual production point to realise this higher output.
• Misconception: opportunity cost only applies to individuals, not to a whole economy. Correct: opportunity cost applies at every level, and on a PPC it is shown as the amount of one good that an economy must give up to produce more of the other.
• Misconception: a PPC can show any number of goods. Correct: a basic PPC diagram shows only two goods, or two categories of goods, measured on its two axes.

Exam-style questions with model answers

Q1. Define 'production possibility curve'. [2 marks]

1. A production possibility curve is a diagram showing the maximum combinations of two goods, or categories of goods, that an economy can produce in a given period, using all of its available resources as fully and efficiently as possible with fixed resources and technology.

Q2. A country's PPC shows that, with all its resources fully employed, it can produce either 60 units of capital goods and 0 units of consumer goods, or 0 units of capital goods and 90 units of consumer goods, with a straight-line trade-off between these points. Calculate the opportunity cost, in units of consumer goods, of producing one extra unit of capital goods. [2 marks]

1. The total fall in consumer goods output across the whole line is 90 units, for a total rise of 60 units of capital goods, so 90 ÷ 60 = 1.5 units of consumer goods given up for each extra unit of capital goods produced.

Q3. Identify three reasons why an economy might be producing at a point inside its production possibility curve rather than on it. [3 marks]

1. Some factors of production, such as workers or machinery, may be unemployed and not currently being used in the production process.
2. Resources that are being used may be organised inefficiently, for example through poor management, so that output is lower than it could be.
3. A recession or a fall in demand may leave factories operating below their full capacity even though resources exist to produce more.

Q4. Explain two causes of an outward shift in a country's production possibility curve. [4 marks]

1. An increase in the size of the labour force, for example through net inward migration or a rising birth rate several years earlier, means more workers are available, so the economy's maximum possible output of both goods can rise.
2. An improvement in technology allows the same quantity of resources, such as the same number of workers and machines, to produce a larger output than before, which shifts the whole curve further from the origin.

Q5. Using a diagram, explain the difference between a movement along a production possibility curve and a shift of the curve. [4 marks]

1. A movement along the curve occurs when an economy reallocates its existing resources between the two goods, for example producing more capital goods and fewer consumer goods, while staying on the same curve because total resources and technology are unchanged.
2. A shift of the curve occurs when the whole curve moves to a new position, outward if productive potential increases, for example because of more resources or better technology, or inward if productive potential falls.
3. On a diagram, a movement along the curve is shown as a slide between two points on one curve, while a shift is shown as a new, separate curve drawn further from, or closer to, the origin than the original.

Q6. Analyse how an increase in investment in capital goods today might affect an economy's production possibility curve in the future. [6 marks]

1. If an economy chooses a production point closer to the capital goods axis today, it produces more machinery, equipment and infrastructure, but at the opportunity cost of producing fewer consumer goods in the present.
2. This greater stock of capital goods increases the quantity and quality of resources available to the economy in later periods, because capital goods are themselves used to produce further output.
3. As a result, the whole production possibility curve tends to shift further outward in the future than it would have done without the extra investment, representing faster economic growth.
4. This outward shift means the economy becomes able to produce combinations of capital goods and consumer goods that were previously unattainable, potentially allowing higher consumption of both goods later.
5. The benefit therefore comes with a trade-off: lower consumption now in exchange for the possibility of higher consumption and output in the future, once the new capital goods raise productive capacity.

Q7. Discuss whether a government should always aim to move its economy from a point inside its production possibility curve to a point on the curve. [6 marks]

1. Moving from a point inside the curve to a point on it means making fuller or more efficient use of existing resources, such as reducing unemployment, which raises output of both goods without needing any extra resources, and this generally raises living standards and tax revenue.
2. However, moving quickly to full employment of resources may put pressure on wages and prices if resources become scarce, potentially causing inflation, and some unemployed resources may be unsuitable for immediate reemployment without retraining.
3. A government may also prefer to accept some spare capacity in the short run if it is directing policy towards other goals, such as reducing an environmental cost of maximum production, or if an economic shock makes rapid reemployment of resources difficult.
4. On balance, moving towards full and efficient use of resources is usually desirable because it allows higher output and incomes at no extra resource cost, but the speed and method of doing so need to be managed carefully to avoid other economic problems.

Key takeaways

• A PPC shows the maximum combinations of two goods an economy can produce with its current resources and technology, fully and efficiently used.
• Points on the curve show productive efficiency; points inside show underused or unemployed resources; points beyond the curve are currently unattainable.
• A movement along the PPC reallocates existing resources between the two goods and always involves an opportunity cost.
• The PPC's concave shape shows increasing opportunity cost as more resources are switched from one good to the other.
• A shift in the PPC changes the whole curve's position, showing a change in the economy's productive potential, rather than just a change in the mix of goods produced.
• An outward shift represents economic growth and can be caused by more resources, better-quality resources, or technological progress.
• An inward shift represents a fall in productive potential, for example from a natural disaster, war or resource depletion.
• Choosing more capital goods today can shift the PPC further outward in future, at the opportunity cost of consumer goods now.

Test yourself

What does a point lying exactly on the PPC represent?

It represents productive efficiency, where the economy is using all of its resources fully, with no unemployed or wasted factors of production.

Why can a point beyond the current PPC not be produced?

Because it requires more output than the economy's current resources and technology allow, so it is unattainable until the PPC itself shifts outward.

What causes the PPC to be drawn concave to the origin rather than as a straight line?

Resources are not equally suited to producing both goods, so switching more and more resources between them causes increasing opportunity cost.

Give one example of a change that would shift a PPC outward.

An increase in the labour force, for example through net inward migration, or an improvement in technology, would shift the PPC outward.

Give one example of a change that would shift a PPC inward.

A natural disaster or war that destroys capital goods and reduces the labour force would shift the PPC inward.

How does a movement along the PPC differ from a shift of the PPC?

A movement along the curve reallocates existing resources between two goods on the same curve, while a shift moves the whole curve to a new position.

What is the opportunity cost of producing more capital goods, shown on a PPC?

It is the quantity of consumer goods that must be given up, since all resources are already fully employed on the curve.