FOP & PPC

FACTORS OF PRODUCTION
◦ LAND  - all natural resources “gifts of nature”

◦ LABOUR  - physical and mental effort that people contribute to the production of goods and services

◦ CAPITAL - also known as “physical capital” a man made FOP used to produce goods and services
◦ Physical capital is also referred to as a capital good or investment good 

◦ ENTREPRENEURSHIP (management) - a special human skill possessed by some people involving

the ability to innovate by developing new ways of doing things
◦ To take business risks and to seek new opportunities for opening and running a business
OTHER MEANINGS OF THE TERM
CAPITAL
◦ Physical capital - one of the FOP consisting of man-made inputs that provide a stream
of future benefits in the form of the ability to produce greater quantities of output
◦ Human capital - refers to the skills, abilities and knowledge acquired by people, as
well as good level of health, all of which make them more productive.
◦ Natural capital - also know as “environmental capital” refers to an expand meaning
of the FOP “land”
◦ Financial capital - refers to investments in financial instruments, like stocks, bonds or
fund (money) that are used to buy financial instruments like stocks and bonds. 
Explain that when an economic choice is made, an alternative is
always foregone
 Opportunity cost
◦ Defined as the value of the next best alternative that must
be given up or sacrificed in order to obtain something
else. 
◦ It is central to the economic perspective of the world, and
results from scarcity that forces choices to be made
PRODUCTION POSSIBILITY
CURVE
Production Possibility Curve (PPC) or
(PPF)
◦ The Production Possibility Frontier (PPF) shows the combination of goods that
a country is capable of producing given the limited resources available to it
at a specific time period with all its resources fully and efficiently used.

◦ The PPF is also called the production possibility curve (because usual

examples have only two goods), opportunity cost curve, or transformation
curve. 
◦ In the diagram and table, notice that as agricultural products increases so does the
opportunity cost of producing an additional unit of agricultural products.
◦ Here, the economy experiences an increasing opportunity cost in the production of
agricultural products.

.
◦ Points A, B, and C on the image show efficient production of goods However, each
point shows a different combination of goods.
◦ In order for the economy to produce the greatest possible output
(somewhere on the PPC) two conditions must be met:

◦ All resources must be fully employed

◦ all resources are being used
◦ If there were unemployment of some resources (unused) – the economy would not be
producing the maximum it can produce.

◦ All resources must be used efficiently

◦ Efficiency – resources are being used in the best possible way to avoid waste.
◦ Productive efficiency – output is produced by use of the fewest possible resources (resources
are produced at the lowest possible cost)
◦ If the output were not produced using the lowest possible resources, the economy would be
“wasting” some resources.
(a)Can a country produce at point D?
- Yes. Feasible production mix but
not efficient

(b) Is this a desirable position for

the economy?
- No because the economy can
produce more with the same
amount of resources.
◦ (c) What are the conditions that can lead to an
economy producing at point D?
- Unmotivated workforce or poor management,
inefficient use of resources (e.g. wasting raw
materials), and refusal to use new production
technology that is more efficient.

(d) Is the economy better off if it moves from

point D to point B?
- Yes, the economy can get more outputs with the
same resources
◦ (e) A point such as E in Diagram 2 is
desirable
Why is point E desirable?
- E represents more of both goods for the
economy- increase in utility

(f) Can the economy produce at this point

given current constraints?
- No, it will have to shift PPF out to E or
beyond.
PPF shifts outwards (increase in production possibilities)
when:

◦ Labor Supply increases.

◦ Capital increases
◦ Human capital increases
◦ Production technology progresses
◦ Productivity increases
◦ New resources are discovered
◦ An economy can achieve the increases mentioned
in the last slide through appropriate investments.
◦ For instance, to increase human capital, a country
can provide free education to school-going-age
children, subsidize vocational training and
provide skill upgrade or retraining programmes.
The latter programmes can also increase
productivity of labour.
◦ An outward shift of the PPF can be interpreted
as economic growth Having said that, a PPC does
not have to shift in parallel manner with respect to
the original curve.

Similarly, a move from point D to point A in

Diagram 2 can also be called economic growth.
 PPF can shift towards the origin when:

i. war destroys capitals and/or

labour
ii.a natural disaster occurs (e.g.
hurricanes, earthquakes, etc.)
iii.drought occurs
iv.supply of inputs is disrupted
(e.g. oil, steel, copper, etc.
 In real world
◦ In the real world no economy is ever likely to produce on its PPC

An economy’s actual output, or the quantity of output actually

produced, is always at a point inside the PPC because in the real
world all economies have some unemployment of resources and some
productive inefficiency. The greater the unemployment or the
productive inefficiency; the further away is the point of production
from the PPC
Explain that a production possibilities curve (PPC or
PPF) model may be used to show the concepts of
scarcity, choice, opportunity cost and a situation of
unemployed resources and inefficiency.