Thursday, September 4, 2014


Production Possibility Curve

Ok, last post we talked about the PPC and what some of the points mean. Lets look at the curve again and add some new points.

2008 AP Microeconomic Exam

Here we have question 1 from the 2008 AP Central released study test. It shows a bowed-out PPC curve with points on the curve, inside the curve, and outside the curve.

Lets take answer (E), It states that the economy is not producing at its potential, since it is not producing at point D.

  • Points outside the curve - Answer Choice (E)/ Point D , (yes I know it's confusing but I didn't design the test) are unattainable because they are beyond what is presently possible given the country's scarce resources.  - Think of potential as potential output which is a level of output that can be achieved using existing levels of technology, resources and with full employment,, in essence,, when you read potential, think on the curve. -- The answer can't be E as points outside the curve are unattainable.
  • Points inside the curve - Answer Choice (D)/ Point E, points inside the curve are attainable but inefficient as scarce resources are not being used. (Usually points inside the curve are representations of unemployment.) The answer can not be D because the country can produce at point E.
  • Points on the curve - Answer Choice (C)/ Point A,B & C, Points on the curve are attainable and efficient combinations as there is no waste of scarce resources. Think full employment, all machines and equipment are being utilized, all resources are being used along with the most innovative technologies. The answer can not be C as at point C there is no butter being made, just machines. (tricky bastards)
  • Answer Choice (B) - The opportunity cost of producing more machines is constant. Due to the fact that the PPC curve is bowed-out lets us know that the opportunity cost is not constant. In this case we know that as we move toward the ends of the curve we give up more and more of the other good,,, opportunity costs increase as we move to the edges of the curve.
  • Answer Choice (A) It is true that if our society has chosen to produce at point C on the curve then all resources are being used efficiently and since it is on the curve we know that it is attainable.

Shifting of the PPC Curve 

  • Outward shifts of the Curve
An outward shift of the PPC reflects growth as combinations of output previously unattainable now become attainable. 

1995 AP Microeconomics Exam
Answer - Economic growth on the PPC is depicted by a rightward shift of the curve (A).

How can this happen?

  • The discovery of new natural resources such as shale gas or oil.
  • Immigration or an increasing of the workforce
  • Introduction of new technology or advances in the techniques of production or an increase in the quality of labour.
  • Trade

  • Example 1 - New stock of resources are found -  OIL is Found in North Dakota 

    Example 2 - New Stock of resources such as an increase in the Labor Force

    1995 Ap Microeconomic Exam
    Answer - An outward shift in the PPC can be caused by (B) the labor force.

    Example 3 - Resources Found - Water in Africa

    Example 4 - Trade between Korea and Canada

    2000 AP Microeconomics Exam
    Answer - A country can consume beyond its PPC when it (A) trades with other countries thus taking advantage of differing opportunity costs.

    Podcast - Paul Romer, Stanford University professor and Hoover Institution Senior Fellow talks with EconTalk host Russ Roberts about growth, China, innovation, and the role of human capital. Also discussed are ideas in creating growth, the idea that ideas allow for increasing returns, and intellectual property and how it should be treated. This 75 minute podcast is a wonderful introduction to thinking about what creates and sustains our standard of living in the modern world.