Question

Please give a broad definition of “production possibilities curve” and explain the sources of economic growth that shift production possibilities curve. (You are expected to give a detailed explanation and examples, but you don’t need to draw diagrams).

Answer 1

Production possibility frontier is the graph which indicates the various production possibilities of two commodities when resources are fixed. The production of one commodity can only be increased by sacrificing the production of the other commodity. It is also called the production possibility curve or product transformation curve.

Increases in the quantity or quality of resources will shift the PPC outward, making it possible to produce greater quantities of both goods. Increases in the quantity of resources include more land, labor, or capital. Increases in the quality of resources most often focus on expanding human capital (skill and knowledge of labor), but could also include anything that makes land, labor, or capital more productive.

Decreases in the quantity or quality of resources will shift the PPC inward. This decreases the possible production of both goods.

If an increase in the quality or quantity of resources (including technological changes) only benefits the production of one of the products, only that side of the PPC will move outward. For example, the development of new fertilizing techniques or improved human capital for farm workers would increase the possible production of corn without impacting the possible production of robots. That would cause the corn side of the PPC to move outward. This shift would also increase the opportunity costs of producing robots while decreasing the opportunity costs for producing corn.