A-LEVEL ECONOMICS

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TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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Question 15 (2010N- Q2)

[INTRODUCTION]
- Meaning of PPC
- Diagram
Production possibility curve (PPC) is a diagram that shows the
combination of two goods produced by an economy by using all its
limited resources at a given level of technology. Other names of
production possibility curve include production possibility frontier
(PPF); and product transformation curve.
Diagram 1: Production Possibility Curve

[BODY]
A PPC can be used to represent some microeconomic and
macroeconomic issues.

MICROECONOMICS
- The areas of
macroeconomics
Microeconomic issues are related to the decisions made by
households (individuals), firms and industries. These topics may
include price mechanism, market failures, market structure, cost
structure of firms, etc. The microeconomic issues represented by
A-LEVEL ECONOMICS
SUGGESTED ANSWER FOR ESSAYS
TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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a PPC are shown as follows:

MICROECONOMIC
ISSUE (1):
OPPORTUNITY COST
- Concave:
increasing
opportunity cost
- Linear line:
constant
opportunity cost
Microeconomic issue 1- opportunity cost
Opportunity cost can be defined as the benefits forgone of the
next best alternative. Due to scarcity of resources, an economy
which produces more of a good, say, Good X, would have to give
up more of another good, say, Good Y. For instance, if Malaysia
allocates more resources in the production of capital goods such
as machines, it would have to give up more units of consumer
goods such as food.

The shape of a PPC can be used to represent the above
mentioned microeconomic issue. Referring to Diagram 1, the
PPC is convex to the origin. This indicates increasing opportunity
cost; i.e. to produce more of good X, the economy would have to
sacrifice more units of good Y; and vice versa.

In addition, a PPC can also be drawn in a downward sloping
linear line as shown in the following diagram:
Diagram (2): PPC in Linear Line
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According to Diagram 2, the PPCs of both year 1 and year 2 are
in the same slope. This indicates a constant opportunity cost. For
example, the opportunity cost of producing 1 unit of Good x is 3
units of Good Y in year 1. In year 2, the opportunity cost of
producing 1 unit of good X remains unchanged, i.e. the economy
would still have to give up 3 units of Good Y in year 2.


MICROECONOMIC
ISSUE (2):
REALLOCATION OF
RESOURCES
Microeconomic issue 2: Reallocation of resources
To produce a bundle of good such as Good X and Y, the
economy would have to combine various types of resources such
as labour and capital. In certain economy, the production would
be more labour intensive where more workers are employed to
produce goods and services whereas others could be more capital
intensive.

The economy would have to reallocate resources when it
A-LEVEL ECONOMICS
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TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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produces different combinations of goods. The movement along
the PPC can be used to represent reallocation of resources.
Diagram 3: Movement along PPC

Diagram 3 shows a movement from A to B. At point A, more
units of Good Y and less units of Good X are produced by the
economy. However, at B, more units of Good X are produced by
the economy. Hence, a move from A to B indicates that more
resources have been reallocated to production of Good Y to
production of Good X.


MACROECONOMICS
- The areas of
macroeconomics
Macroeconomic issues are related to the aggregates. The
issues regarding the international trade, economic problems,
macroeconomic policies are categorized as macroeconomic
issues. A PPC can also be used to represent several
macroeconomic issues such as employment level and
performance of the economy.
A-LEVEL ECONOMICS
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TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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MACROECONOMIC
ISSUE 1: EMPLOYMENT
LEVEL
Macroeconomic issue 1: employment level
The employment level of an economy can be represented by
three static points of a PPC respectively.
Diagram 4: Static Points of PPC


According to Diagram 4, point A is a combination of goods that
falls on the PPC. This shows that the economy has achieved full
employment level. The economy which is in full employment level
has fully utilized all its existing resources. The economy does not
have any spare resource to make more of two goods at the
moment.

On the other hand, point B on Diagram 4 falls within the PPC.
This indicates that the economy is at unemployment level. The
economy still has spare resources to produce more of good X and
good Y without having to give up anything as the existing
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TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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resources are not fully utilized.

Point C on Diagram 4 falls outside the PPC. It indicates a
combination of goods which is unattainable. This occurs because
the existing resources owned by the economy are insufficient. In
order to produce this bundle of goods, the economy would have to
obtain more factors of production so that the PPC would shift to
the right in future.

MACROECONOMIC
ISSUE 2: ECONOMIC
PERFORMANCE
Macroeconomic issue 2: Economic performance
An economy may experience economic growth or decline in
economy from year to year. When the economy achieves
economic growth, its national income increases, investment level
rises and people enjoy better standard of living. Nevertheless,
when there is decline in economic performance, the national
income would decreases, investment level falls and standard of
living becomes poorer.

The shifts in PPC can be used to assess the economic
performance of a country.

Firstly, an outward shift which is illustrated by Diagram 5
indicates economic growth.
Diagram 5: Outward shift of PPC
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Outward shift of the PPC shows that the economy is now able
to increase the maximum outputs of both good X and good Y, i.e.
the production possibility has increased. PPC of an economy
would shift outward because of an increase in quantity of factors
of production or improvement in quality of resources. The
innovation of technology is one of the factors that cause a PPC to
shift outward. If better technologies are available, the economy
would be able to raise outputs and hence economic growth can be
achieved.

In addition, an inward shift of a PPC would indicate a decline in
economy.
Diagram 6: Inward shift of PPC
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An inward shift of the PPC shows a decrease in production
possibility of an economy. PPC of an economy would shift inward
because of a decrease in quantity of factors of production or
deterioration in quality of resources. For instance, unlimited
exploitation of minerals would cause natural resources to be used
up in future. Without having sufficient supply of minerals, the
economy would not be able to raise its outputs. Therefore,
potential outputs would fall and the economy experiences
recession.


[CONCLUSION]
As conclusion, a PPC can be used to represent microeconomic
and macroeconomic issues. The shape of the PPC represents the
opportunity cost. The movement along the PPC represents
reallocation of resources. These are the microeconomic issues
represented by a PPC. Besides, the three static points of a PPC
indicates employment level while shifts in PPC can be used to
A-LEVEL ECONOMICS
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TOPIC 1.4- PRODUCTION POSSIBILITY CURVE

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assess economic performance of a country. These are classified
as macroeconomic issues.


Question 14 (2011N- Q2)

The answer is similar to that of the above question.
However, we only need to illustrate any TWO ideas.
We do not need to tell whether is idea is microeconomic issue or macroeconomic isssue.