Cambridge IGCSE Economics 0455 – The Basic Economic Problem: Production Possibility Curve (PPC)
The Basic Economic Problem – Production Possibility Curve (PPC)
1. What is a Production Possibility Curve?
The Production Possibility Curve (PPC) is a graphical representation showing the maximum possible output combinations of two goods that an economy can produce when all resources are fully and efficiently employed.
2. Key Assumptions Behind the PPC
Resources are scarce and fixed in quantity.
All resources are fully employed (no unemployment).
Resources are used efficiently (no waste).
Technology and the state of knowledge are constant.
Only two goods are considered for simplicity.
3. Shape of the PPC and Opportunity Cost
The PPC is usually bowed‑outward because resources are not equally suitable for producing both goods. This curvature reflects increasing opportunity cost.
Opportunity cost can be expressed as:
\$OC = \frac{\Delta \text{Quantity of Good B}}{\Delta \text{Quantity of Good A}}\$
As production of Good A expands, more of the resources best suited to Good B must be reallocated, raising the opportunity cost.
4. Interpreting Points on the PPC
Point on the curve: Efficient production – the economy is using all resources optimally.
Point inside the curve: Inefficient or under‑utilisation of resources (e.g., unemployment, idle factories).
Point outside the curve: Unattainable with current resources and technology.
5. Causes of Shifts in the PPC
A shift of the entire PPC reflects a change in the economy’s capacity to produce. The direction of the shift depends on whether the change is positive (growth) or negative (contraction).
Factor
Effect on PPC
Resulting Economic Situation
Increase in the quantity of resources (e.g., more labour, capital, land)
Outward shift
Economic growth – higher potential output of both goods.
Improvement in technology or better organisation
Outward shift (often more pronounced for the good whose production benefits most)
Higher productivity, potential for growth and higher standards of living.
Decrease in resource quantity (e.g., natural disaster, war)
Inward shift
Economic contraction – lower potential output, possible recession.
Technological regression or loss of skilled labour
Inward shift
Reduced productivity, higher unemployment.
6. Consequences of an Outward Shift (Economic Growth)
Higher potential output: The economy can produce more of both goods, raising the standard of living.
Reduced unemployment: More resources are required, moving points from inside the curve to the curve.
Potential for lower prices: Increased supply can put downward pressure on prices, helping to control inflation.
Greater choice for consumers: With more goods available, consumer welfare improves.
7. Consequences of an Inward Shift (Economic Contraction)
Lower potential output: The economy cannot produce as much, reducing living standards.
Higher unemployment: Resources are under‑utilised, moving points inside the curve.
Possible upward pressure on prices: If demand remains steady while supply falls, inflation may rise.
Reduced consumer choice: Fewer goods are available, lowering welfare.
8. Diagrammatic Representation
Suggested diagram: A standard PPC showing an outward shift (growth) and an inward shift (contraction). Label points A (efficient), B (inefficient), and C (unattainable). Include arrows indicating the direction of the shift.
9. Summary Checklist for Exam Answers
State the factor causing the shift (e.g., more capital, better technology).
Identify the direction of the shift (outward = growth, inward = contraction).
Explain the impact on potential output, unemployment and price level.
Link the change to the basic economic problem of scarcity and choice.
10. Practice Question
Question: A country discovers a large deposit of oil. Explain, using a PPC diagram, how this discovery will affect the country’s production possibilities and the likely macro‑economic consequences.
Key points for answer:
Increase in resource quantity → outward shift of the PPC.
Higher potential output of both oil‑related goods and other goods.
Potential reduction in unemployment and increase in national income.
Possible improvement in terms of trade if oil is exported.