Production possibility curve notes for GCE O' LEVEL

Production Possibility Curve/Production Possibility Boundary/Production Possibility Frontier

From the point of view of an Economy, there is an opportunity cost of using its resources. Production Possibility curve (PPC) shows the maximum combinations of goods and services that can be produced by an economy in a given time period with its limited resources.

In the graph, if all the resources are used to produce Schools then there will be no Hospitals. If you move to the other end then all the resources would be used to produce Hospitals and not Schools will be there in the economy. Government has to move along this curve and decide the best possible combination of goods to produce. For example Z, shows the possible combinations of School buildings and Hospitals. Thus, it is impossible to build more Schools without also building fewer Hospitals.

Resources have to be switched from building more Hosipitals to building more Schools. This is known as rellocation of resources. Before the rellocation of resources we will have to consider the costs of rellocating these resources between uses. This costs will include retraining cost of our workforce and the time consumed in this rellocation.

Any point outside the curve is unattainable unless there is an outward shift of the PPC. This can only be possible if there is an improvement in the quantity and/or quality of factors of production. This is known as economic growth. It is a process of increasing the economy’s ability to produce goods and services.