Production possibility curves
Chapter 5
Objectives
• Explain the meaning and purpose of a production
possibility curve
• Explain the shape of the production possibility curve,
including the difference between constant opportunity
costs and increasing opportunity costs
• Analyse the causes and consequences of shifts in a
production possibility curve
• Discuss the significance of a position within a
production possibility curve.
Production Possibility Curve
• The quality and quantity of factors of production determines an
economy’s production possibilities – the goods and services it can
produce with the resources it has available.
• A simple economic model, known as a production possibility curve
(PPC), can be used to show the choices available and how resources are
allocated
• The PPC shows the maximum level of output of each of the two goods
that can be produced.
• The PPC is sometimes called the production possibility frontier since it
draws a type of boundary between what can be produced and what cannot
be produced
• For constant opportunity cost the opportunity cost of switching production from
one good to the other is constant.
• So, a fall in production of Good B leads to the same proportionate increase in
Good A
• For increasing opportunity cost the reduction in output of Good B is matched by a
greater increase in Good A.
• The PPC is bowed or curves outwards
• So the opportunity cost of a fall in output of Good B is greater output of Good A
A trade-off between products
• A trade-off is the process of deciding whether to give up some of one good to obtain more of another.
• So, if it is decided that more televisions are to be produced, the trade-off is that, as current resources are
being fully used, fewer cars can be produced
A change in available resources
1.A production possibility curve is drawn on the assumption that:
A there are always opportunities to produce more of one good.
B all existing resources are being used and there is a given state
of technology
C all existing resources are being used.
D production never takes place within or outside the production
possibility curve.
2. A country produces at a new point within its production possibility
curve when:
A new technology is being applied to increase production.
B there is an increase in capital investment by firms.
C more is needed of one good and not the other good.
D there is a fall in unemployment.
3. An economy produces two goods: cars and smartphones. Why is the
production possibility frontier curved outwards from the origin?
A All resources are being fully used.
B The opportunity cost of producing cars or smartphones is constant.
C An increase in production of cars can only occur if there is a
decrease in the production of smartphones.
D Some of the economy’s resources are better suited to the production
of cars, other resources better suited to the production of smartphones
4. An economy produces two goods: cars and smartphones. Its production
possibility curve shifts outwards. What would have caused this shift?
A the discovery of a new valuable oil reserve.
B closure of an inefficient car assembly plant
C an increase in sales tax on cars and smartphones
D a fall in the rate of unemployment
5. An economy produces two goods: cars and smartphones. The diagram shows that, as a result of a technological advance,
more smartphones can be produced for the same resources.
What is the change in the opportunity cost of producing OC cars?
A PN to PM
B PM to QN.
C PQ to PM
D QM to PM
6 . The diagram shows that the production possibility curve of cars and smartphones has
c
changed from PPC1 to PPC2.
THE END