Drawing and interpretation of the PPC diagram

The Basic Economic Problem – Production Possibility Curve (PPC)

Learning Objective

By the end of this lesson you should be able to:

• Explain why the basic economic problem exists.
• Draw a simple Production Possibility Curve (PPC) for an economy that produces two goods.
• Interpret the PPC – identify points of efficiency, inefficiency, unattainable output and economic growth.
• Analyse the shape of the PPC and relate it to opportunity cost.

1. The Basic Economic Problem

Resources are scarce while human wants are unlimited. This creates the need to make choices about what to produce, how to produce it and for whom.

2. What is a Production Possibility Curve?

The PPC is a graphical representation showing the maximum possible output combinations of two goods that an economy can produce with its available resources and technology.

3. Key Features of the PPC

• Points on the curve – productive efficiency (all resources fully employed).
• Points inside the curve – inefficiency or unemployment of resources.
• Points outside the curve – unattainable with current resources/technology.
• Shape of the curve – reflects the nature of opportunity cost:

  • Straight line → constant opportunity cost.
  • Concave (bow‑shaped) → increasing opportunity cost.

• Shift of the curve – represents economic growth (outward shift) or decline (inward shift).

4. Steps to Draw a Simple PPC

1. Label the horizontal axis as Good A and the vertical axis as Good B.
2. Choose three realistic production points:

   • All resources to Good A (point A₁).
   • All resources to Good B (point B₁).
   • A combination using some resources for each good (point C₁).

3. Plot the three points on the graph.
4. Connect the points with a smooth curve (straight line for constant opportunity cost, bowed‑out for increasing).
5. Mark the curve as “PPC”.

5. Interpreting the PPC

Consider the following example where an economy produces Cars (Good A) and Computers (Good B).

6. Opportunity Cost on the PPC

Opportunity cost is the amount of one good that must be given up to produce an additional unit of the other good.

For a small movement from point \$C1\$ to \$C2\$ on a bowed‑out PPC:

\$\text{Opportunity Cost of 1 Car} = \frac{\Delta \text{Computers}}{\Delta \text{Cars}}\$

Because the curve is concave, the numerator (loss of computers) becomes larger as we move further right, showing increasing opportunity cost.

7. Economic Growth and the PPC

An outward shift of the PPC indicates that the economy can produce more of both goods, usually because of:

• Increase in the quantity of resources (e.g., more labour, capital).
• Improvement in technology.
• Better education and training.

Conversely, an inward shift signals a reduction in productive capacity.

8. Sample Examination Question

Question: Explain why a point inside the PPC represents unemployment of resources and how the economy can move to a point on the PPC.

Answer (key points):

1. Inside the curve means not all resources are being used – e.g., workers idle, factories under‑utilised.
2. To move to the curve the economy must increase the utilisation of these idle resources (e.g., through better training, incentives, or re‑allocation).
3. When resources are fully employed, the economy operates on the PPC, achieving productive efficiency.