1. “Production Possibility Curves”
Economics
“Production Possibility Curves”

2. Starter Make a table with two columns – “WANTS” and “NEEDS”
In each column write down ten things that you, right now in your life, want or need and write a price (estimate) for each
Total the price at the bottom of your table
Then below this total, write down your monthly income

3. The Economic Problem
Most of us want better food, clothing, housing, schooling, holidays, hospital care, and entertainment – Unlimited wants and needs
But there is not enough to go around – Limited resources
This gives rise to the basic economic problem of choice under conditions of scarcity.
If we cannot have everything we want, we must choose what we will and will not have.

4. Economy’s Resources
An economy’s resources fall into four main categories:
Land – Land, forests, minerals
Labour – Human resources
Capital – Tools, machinery, factories
Entrepreneurs – People who take risks by introducing new products and new ways of making old products

5. Production Possibility Curve
We are now going to illustrate on a diagram some of the issues surrounding economic choices.
Production Possibility Curve – Shows the maximum amount of two products that can be made in this time period with current resources and technology

6. Drawing a Production Possibility Curve
Let us construct a simple Production Possibility Curve to assess the options open to a farmer who can use land to grow either wheat or maize:
Each axis shows quantity of goods made
Q Maize L
LM is a production possibility curve (PPC) M
Q Wheat

7. One Possible Resource Allocation
Resource Allocation – a given use of land, labour and capital L
Q Maize
For instance, the farmer can opt to use all resources to produce combination A: A R R
OR maize and
OS wheat M S
Q Wheat

8. An Alternative Resource Allocation
Alternatively the farmer can use all current resources and be at point B on PPC and produce: L
Q Maize
OT maize and
OV wheat B T M V
Q Wheat

9. Resource Reallocation
Switching factors of production to alternative uses is called reallocation of resources L
Q Maize
For instance, reallocating land, labour and capital from sugar production into wheat means moving from A to B A R B T
How much wheat is gained and how much maize is lost? M S
Q Wheat V

10. Opportunity Cost
The economic decision to move from A to B and product more wheat involves a sacrifice –LOST MAIZE L
Q Maize
Opportunity Cost – Measurement of cost by reference to the alternatives forgone A R
LOSS
The opportunity cost of SV extra wheat is
RT maize forgone B T
GAIN M S V
Q Wheat

11. The opportunity cost of OR maize is SM wheat
Continued…
The farmer is at point A L
Q Maize
What is the opportunity cost of producing OR maize?
At A - OS wheat is being produced A R
SM extra wheat could be produced if all resources are put into wheat
The opportunity cost of OR maize is SM wheat M S
Q Wheat

12. PPC and Economic Growth
The PPC is drawn assuming:
A fixed amount of resources
Constant state of technology
What happens to the PPC if there is an increase in the quantity or quality of resources available?

13. Shifts in the PPC LM is the initial position of the PPC Q Maize U
More resources are acquired e.g. another field
PPC shifts outwards to the right to UV L M V
Q Wheat

14. Continued… LM is the initial position of the PPC Q Maize
The productivity of staff and machinery producing wheat increases but productivity of resources producing maize is unchanged L
PPC pivots around L and becomes LZ M Z
Q Wheat

15. PPC and Efficiency
Point E is efficient: all resources are fully employed L
Q Maize
Point I is inefficient: some resources are unemployed U E
Point U is unattainable given current resources and technology I M
Q Wheat

16. Can You Use the PPC to show:
Resource Allocation
Resource Reallocation
Opportunity Cost
Economic Growth
Changes in Productivity
Changes in Efficiency