Understand the definition of the production possibility curve (PPC)
Understand the illustration of the PPC
Understand the factors affecting the PPC
Use the PPC to illustrate the concepts of scarcity, choice and opportunity cost.
For a start, watch the two videos below
Think of how these events will affect these countries' resources and the production capacity. Due to the skills upgrading and push for greater productivity in Singapore, how do you think Singapore's quality of labour will be affected?
Impact on physical resources: Fukushima Japan Nuclear Disaster in 2011
Impact on labour resources: Singapore and Skills Upgrading - Speech by the late Mr Lee Kuan Yew, founding Prime Minister of Singapore
What is the production possibility curve?
How many goods and services is an economy capable of producing? This is determined by the quantity and quality of resources available to it, and the state of technology. These factors determine an economy's production possibilities.
The production possibility curve (PPC) is a diagram that shows all the possible combinations of goods that an economy can produce within a specific time. It also shows the choices that an economy has in the use of its resources.
Get started by watching the video [10:54] below! This video explains how we draw the PPC (axis and shape) and use points within, on and outside the PPC so that we can use it in application.
While watching, think of how the above two events will affect Japan's and Singapore's PPC respectively.
Applications of the Production Possibility Curve (PPC)
Illustrating Scarcity, Choice and Opportunity Cost
Illustrating Growth
Economic growth is usually associated to higher incomes and higher standards of living. In Economics, we make the distinction between an increase in the output of a country (actual economic growth) and an increase in the productive capacity (potential economic growth).
Illustrating Present Choices and Future Growth Possibilities
Summary
The PPC shows the maximum combinations of goods or services that can be produced in a fixed period of time with a given set of resources and state of technology.
At any point on the PPC, society is making full use of all resources.
At any point inside the PPC, there is unemployment of some resources.
Points on and within the PPC are attainable, while points beyond the PPC are unattainable.
The factors affecting the PPC are the quantity of resources, the quality of resources and the state of technology of a country.
This diagram is a powerful tool used to illustrate many important economic concepts like:
Checkpoint Try the following multiple choice questions :
Qn 1.How was Japan's production possibility curve affected by the Fukushima nuclear disaster in 2011? (a) Japan's PPC remained unchanged. (b) Japan's PPC shifted outwards. (c) Japan's PPC shifted inwards. [correct answer: explanation - the disaster destroyed buildings and claimed many lives. This translated to a reduction in quantity of resources, especially capital and labour. A reduction in quantity of resources decreased Japan's production capacity, hence the PPC shifted inwards.]
Qn 2. From the video above, the late Mr Lee Kuan Yew emphasized the importance of skills upgrading for older workers in Singapore. How would Singapore's PPC be affected if the push towards skills upgrading is successful?
(a) Singapore's PPC will most likely shift outwards. [correct answer: explanation - if the push for skills upgrading is a success, more Singapore workers will be trained and they will possess greater skills. This will mean an improvement in the quality of Singapore's labour resource, hence Singapore's PPC will shift outwards.] (b) Singapore's PPC will remain unchanged. (c) Singapore's PPC will most likely shift inwards.
Qn 3. When there is a movement from point A within the boundary of the PPC to point B on the PPC, it means that
(a) the country’s resources are more fully employed. [correct answer. A movement from a point in the PPC to a point on the PPC represents a more efficient use of resources. It is usually associated with lower of unemployment rate, and the country is near or at full employment] (b) there are more resources in the country. (c) there is an improvement in technology.
Qn 4. A production possibility curve cannot tell us
(a) whether the production of a particular combination of goods is possible. (b) whether the resources are being efficiently utilised for a given combination of goods. (c) the combinations of goods a society should produce. [correct answer - the combinations of goods a society should produce is determined by the goals the society wants to achieve, and this cannot be seen by the production possibility curve.] (d) the opportunity cost of increasing the production of some good.