The economy can only produce goods and services within or on the PPC, as shown on the diagram below. All points shown are some examples of possible points of production for the economy. The economy is, at least theoretically, able shift its production from one point to another.
At point C resources are not fully employed. Moving to anywhere on the PPC will mean employing all the available resources in the most efficient manner. This is a key concept and it’s closely related to one of the fundamental questions of economics — How to Produce. It’s so important that there is a special name for it — productive efficiency.
There are many definitions for productive efficiency (which you will encounter eventually), but the one we will concern ourselves with at the moment is the one used above — productive efficiency means producing on the PPC, where all available resources are fully employed.
Shifts in PPC
Other than the movement of points, the PPC can also shift in the following ways:
Above, it’s like that there is an increase in productivity for one of the goods whereas the total resource pool in the economy remains unchanged. An example would be an improvement in technology for producing Good X while things remain unchanged for good Y.
This is called an outward shift. This may happen in three scenarios:
- When the pool of resources increases.
There’s a general increase in quality of resources
A technological growth.
Generally, this is associated with long-term economic growth.
Conversely, there can be an inward shift of the PPC as well. This will happen when resources are destroyed or when productivity falls back. For instance, during a war the PPC can shift inwards.
To summarise, productive efficiency means producing on the PPC. Shifts in PPC are associated with changes in one or more of the following: underlying technology, quantity and quality of resources, and productivity.
Question of the Day
Answers will be given tomorrow.
In the economy above, only planes and corns are produced, which diagram or diagrams potentially show an increase in the labour force?
d) A & B
e) B & C
f) A, B, & C.
- Explain two ways in which an economy might move from a point within its production possibility curve (PPC) to a point on it. [10 marks]
Discuss the most effective economic policies to move the PPC outwards. [15 marks]
We look forward to seeing your responses in the comments section below!
And if you have yet to subscribe to the daily 5 Minutes Only Lah!, you can read more about it here or simply subscribe below.
Till next time, dream economics.
Everyday is a second chance. (But chances do eventually run out.)