How can a model show the trade-offs an economy faces with limited resources?
Construct and interpret a production possibility frontier to illustrate scarcity, choice, opportunity cost, efficiency and growth.
How the PPF models scarcity, opportunity cost, efficiency and economic growth, and why it usually bows outward from the origin.
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What this dot point is asking
You must be able to draw a PPF, read points on, inside and outside it, explain its shape, and use it to illustrate opportunity cost, efficiency and economic growth.
What the PPF shows
The PPF is drawn for an economy producing just two goods, for example consumer goods and capital goods. The two axes measure the quantity of each good. The curve maps the maximum output of one good for every level of output of the other, assuming resources and technology are fixed and fully used.
Picture a curve falling from a high point on the vertical axis to a high point on the horizontal axis, bowing outward away from the origin.
Scarcity, choice and opportunity cost on the PPF
- Scarcity is shown by the unattainable region beyond the frontier - the economy simply cannot reach it now.
- Choice is shown by selecting any point on the curve, deciding the mix of the two goods.
- Opportunity cost is shown by the downward slope. To produce more of one good, the economy must move along the curve and give up some of the other.
Why the PPF bows outward
The curve is concave to the origin (bowed out) because of the law of increasing opportunity cost. Resources are not equally suited to producing both goods. As the economy shifts more resources toward one good, it must use resources that are progressively less suited to it, so each extra unit costs more of the other good than the last.
If opportunity cost were instead constant, the PPF would be a straight downward-sloping line.
Efficiency and unemployment
A point inside the frontier signals that the economy is not using all its resources, or is using them poorly. This typically reflects unemployment of labour or idle capital. Moving from an interior point out to the frontier raises output of both goods at no opportunity cost, because previously idle resources are put to work.
Economic growth: shifting the frontier
The frontier itself shifts outward when productive capacity increases. Causes include:
- More resources (population growth, new land or capital, immigration).
- Better technology or productivity.
- Improved skills and education of the workforce.
An outward shift represents economic growth: combinations once unattainable become possible. A shift inward (war, natural disaster, capital destruction) represents a fall in capacity.
Producing more capital goods today (rather than consumer goods) shifts the future PPF outward by more, because capital expands future productive capacity. This is the growth-versus-consumption trade-off.
Exam-style practice questions
Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
2020 SACE Stage 22 marksA diagram shows the meat production possibilities for, and realised production of, beef and chicken in 1960. On this diagram, illustrate the meat production possibilities for beef and chicken in 2020. (Since 1960 chicken production has had significantly larger gains in efficiency than beef.)Show worked answer →
This is a 2-mark diagram task. Describe what to draw and why it earns the marks.
Shift the frontier outward, but unevenly (1 mark). Draw a new PPF that lies outside the 1960 curve, reflecting economic growth from greater productive capacity. Because efficiency gains have been much larger in chicken than beef, the curve should pivot or extend further along the chicken axis than the beef axis, so the maximum chicken output rises by more.
Show the realised point moving (1 mark). Place the 2020 production point on or near the new frontier, located so that more chicken (and relatively less or similar beef) is produced, consistent with chicken becoming the most purchased meat.
Markers look for an outward shift biased towards chicken, not a uniform parallel shift, plus a sensible production point.
2019 SACE Stage 21 marksA report identified long-term benefits of driverless vehicles for Country A, including a 2% increase in GDP and new employment opportunities. Indicate on the production possibility diagram (consumer goods on one axis, capital goods on the other) the possible long-term impact of the use of driverless vehicles on the economy of Country A.Show worked answer →
One mark for the correct shift.
Draw the entire production possibility frontier shifting outward (to the right, away from the origin). The driverless-vehicle technology raises productivity and adds capital and labour resources, so the economy can now produce more of both consumer goods and capital goods. This outward shift represents long-run economic growth, which is exactly what a 2% rise in GDP and new technology-related employment imply.
Do not just move a production point along the existing curve, that would show only a change in the mix of output, not growth. The full curve must shift out.