Production Possibility Curves

Question 1

What is the importance of the production possibility diagram?

Answer 1

The production possibility diagram is important as it is used heavily by economists to understand:

• the basic economic problem of relative scarcity
• concepts of efficiency and inefficiency in allocating resources
• a nation’s productive capacity is limited at a point in time
• the careful choices must be made in deciding how resources are allocated to satisfy needs and wants
• all economic decisions involve an opportunity cost
• a country’s economy may grow

Question 2

Assumptions of the PPC

Answer 2

1. an economy aims to use all resources fully and efficiently
2. there are only two goods produced in this simplified economy
3. all resources can be used to produce each good, and hence there must be perfect mobility between production of the goods
4. the level of technology is assumed to be fixed
5. resources are fixed

Question 3

Production possibility frontier

Answer 3

The PPD contains a production possibility frontier which represents the productive capacity or a nation’s potential output of goods and services, given the efficient and complete use of all resources. It therefore marks the current boundary or border between possible and impossible combinations of goods and/or services.

• total quantity of goods is shown on the y axis
• total quantity of services is shown on the x axis

Question 4

Allocative Efficiency

Answer 4

An efficient allocation of resources is defined as a desirable situation where resources are used to produce particular types of goods and services that best maximise the overall satisfaction of society’s needs and wants, wellbeing or living standards.