Drawing and interpretation of the PPC diagram

Production Possibility Curve (PPC) – Cambridge IGCSE 0455

Learning objectives

• Explain why scarcity creates the basic economic problem.
• State the definition of the Production Possibility Curve using the exact syllabus wording.
• Draw a correctly scaled PPC for an economy that produces two goods.
• Interpret every part of the diagram – points on, inside and outside the curve, the shape of the curve and what it tells us about opportunity cost, and the meaning of outward or inward shifts.
• Analyse how changes in resources or technology cause the PPC to shift.

1. Scarcity and the basic economic problem

Resources (land, labour, capital, entrepreneurship) are scarce while human wants are unlimited. Because of scarcity societies must decide:

1. What to produce (choice of goods and services).
2. How to produce it (methods and techniques).
3. For whom to produce it (distribution of output).

The Production Possibility Curve visualises the trade‑offs that arise from these choices.

2. Definition of the PPC (syllabus wording)

The Production Possibility Curve (PPC) is a graph that shows the maximum feasible combinations of two goods that an economy can produce using its existing resources and technology, assuming full and efficient use of those resources.

3. Key features of the PPC

• Points on the curve – the economy is at productive efficiency; all resources are fully employed.
• Points inside the curve – indicate resource under‑utilisation (unemployment, idle factories) and therefore inefficiency.
• Points outside the curve – are unattainable with the current resources and technology.
• Shape of the curve

  • Straight line – constant opportunity cost (the trade‑off between the two goods is the same at every point).
  • Bow‑out (concave) curve – increasing opportunity cost (more of one good must be given up to produce additional units of the other as production moves away from the axis).

• Shifts of the curve

  • Outward shift = economic growth (the economy can produce more of one or both goods).
  • Inward shift = economic decline (the economy’s productive capacity falls).

4. How to draw a PPC – checklist & step‑by‑step

Examiner checklist (what the examiner looks for)

1. Choose two realistic goods (e.g., Cars and Computers).
2. Decide the maximum output of each good if all resources were devoted to that good alone – these give the two intercepts.
3. Use a consistent scale on both axes (equal spacing) so the diagram is properly scaled.
4. Plot at least four points:

   • One at each intercept (all resources to one good).
   • Two interior points that show a change in the trade‑off (required for a bowed‑out curve).

5. Label the axes with the good’s name and the unit of measurement (e.g., “Cars (units)”).
6. Connect the points with a smooth curve:

   • Straight line for constant opportunity cost.
   • Concave (bow‑out) for increasing opportunity cost.

7. Label the curve “PPC”.
8. Mark the plotted points (A₁, B₁, C₁, D₁ …) and, where relevant, draw arrows to show movement (e.g., from D₁ to C₁).

Step‑by‑step example

1. Horizontal axis – Cars (units); vertical axis – Computers (units).
2. Maximum possible output:

   • All resources to Cars → 100 Cars, 0 Computers (point A₁).
   • All resources to Computers → 0 Cars, 200 Computers (point B₁).

3. Choose two mixed‑production points that illustrate increasing opportunity cost:

   • C₁ (40 Cars, 80 Computers)
   • C₂ (60 Cars, 55 Computers)

4. Plot A₁, B₁, C₁ and C₂, label each point, and draw a smooth bow‑out curve through them.
5. Inside the curve, plot D₁ (30 Cars, 60 Computers) to represent under‑utilisation.
6. Outside the curve, plot E₁ (120 Cars, 30 Computers) to illustrate an unattainable combination.

5. Interpreting the PPC – example table

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.

Formula (for a small movement between two points):

\[

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

\]

On a bowed‑out PPC the value of \(\Delta \text{Computers}\) becomes larger as we move rightwards (producing more Cars) – this is increasing opportunity cost. A straight‑line PPC gives the same ratio at every point – constant opportunity cost.

7. Economic growth and decline – shifts of the PPC

An outward shift means the economy can now produce more of one or both goods; an inward shift means the opposite.

Three main drivers of an outward shift (economic growth) – syllabus requirement:

1. Increase in the quantity of resources – more labour, more capital equipment, more land.
2. Improvement in the quality of resources – better education and training, healthier workforce, more skilled managers.
3. Technological advancement – new production techniques, better machinery, innovation.

The reverse of any of these (loss of resources, deterioration of skills, or outdated technology) causes an inward shift.

8. Sample examination question (2 marks)

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 – 2 marks)

1. Inside the curve means not all resources are being used – e.g., workers are idle, factories are not operating at full capacity, so the economy is not productively efficient.
2. The economy can move to the PPC by increasing utilisation of idle resources – for example through better training, incentives for work, or re‑allocation of labour and capital to productive activities.

9. Suggested diagram (for the exam or class notes)

• Horizontal axis: “Cars (units)”.
• Vertical axis: “Computers (units)”.
• Mark the intercepts A₁ (100, 0) and B₁ (0, 200).
• Plot C₁ (40, 80) and C₂ (60, 55) and draw a smooth bow‑out curve through A₁, C₁, C₂, B₁.
• Inside the curve, plot D₁ (30, 60) and label “inside – under‑utilisation”.
• Outside the curve, plot E₁ (120, 30) and label “outside – unattainable”.
• Draw a second, larger bow‑out curve to illustrate an outward shift and label it “Economic growth”.
• Use arrows to show movement:

  • From D₁ to C₁ (inefficient → efficient).
  • From C₁ to C₂ (trade‑off, increasing opportunity cost).