ABU NAYEEM MOHAMMED SUYEEB

CONTACT: 01752408560, 01857175686

Chapter 2: Production Possibility Curve

Definition
A production possibility curve illustrates the different combination of goods and services that a
country can produce.
Goods C

B
A PPC

Services
If the country is producing at any point inside the curve, for example. A, this suggests that there
is inefficiency in the economy. Either resources are unemployed, or inefficient methods of
production are being used. Points on the curve. B, represents maximum levels of output if the
economy is operating at 100% efficiency. Points such as C are not attainable given the country’s
current productive capacity.

Opportunity cost and Production Possibility Curves:

Consumer goods

50 A
30 B

0 40 90 Capital goods
In the above diagram, the country is originally producing at A (50 consumer goods and 40
capital goods). If it decides to increase its production of capital goods from 40 to 90 by moving
to B, its production of consumer goods will fall from 50 to 30. Therefore, the opportunity cost
of moving from A to B is 20 consumer goods.
 ABU NAYEEM MOHAMMED SUYEEB
CONTACT: 01752408560, 01857175686

Factors that cause a shift in the PPC

Factors that may cause the production possibility curve to shift outwards:

• An increase in the labour force

• An increase in the inventory/stock of capital goods
• Discovery of natural resources
• Technological advances

Consumer goods

B
A

Capital goods

Factors that may cause the PPC curve to shift inwards:

• War
• Natural disasters. Ex. Floods, famine, earthquake
Consumer Goods

A
B

Capital goods
 ABU NAYEEM MOHAMMED SUYEEB
CONTACT: 01752408560, 01857175686

Problems of over specialization

The country could decide to specialize in the production of one particular good. However, this
could lead to the following problems:

• The country will have to import other goods from abroad. However, the country could
face serious problems if it relies too much on imports. For ex. If the price of these
imports goes up, this will lead to cost push inflation.
• If the country is specializing in the production of agriculture, it will export agriculture in
exchange for manufactured goods. However, if the demand for agriculture falls, the
country could experience serious balance of payment difficulties.
• A country that overspecializes in a commodity has an immobile workforce, as most of
the labour will only be skilled in that particular trade. As a result, there will be high
levels of unemployment if the demand for the commodity falls.