Production Possibility Curve

Production Possibility Curve:

The following is a curve representing all possible combinations of two goods that can be produced by an economy where all of its resources are fully and efficiently employed.

Point X:

The economy can exist at this point but it is being inefficient. Point X Is considered inefficient as resources are idle. This could mean that workers are unemployed or unmotivated, machines are idle or that factories are half used.

Point Y:

Point Y is unattainable as the economy doesn’t have enough resources to produce both of the products.

Movement Along The Curve:

Movement along the PPC involves an opportunity cost. For instance if the economy moves from point A to B less product B will be formed and less product A will be produced as compared to before. This would result in an opportunity cost of some product A that was first produced. Therefore all along the PPC, opportunity cost is incurred.

Shifts In The Production Possibility Curve:

Rightward Shift:

Reasons for rightward shift:

• The quantity of resources available for production can increase e.g. labor can increase if there is an increase in population.
• Increase in the capital, where more machines, factories and tools are produced.
• The quality of resources might have improved.

Leftward shift:

Reasons for leftward shift:

• Less resources available.
• The PPC can also shift inwards to the left due to war or natural disasters, which reduce a country’s resources.

Changes In The Slope Of The PPC:

If there is a change in the quantity and quality of resources, which are specific to the production of one type of good, then the entire PPC will not shift to the right, but only the slope will change.

E.g. Technological improvement in the production of product B has caused the maximum number of product B to increase, but the maximum number of product A doesn’t change. It can also be the other way around i.e. where the slope moves vertically upwards indicating an increase in the maximum number of product A.