sub-topic 1.

5:

The
Production
Possibility
curve (ppc)
 Learning intentions
2

➜ analyse the causes and

➜ explain the meaning and consequences of shifts in a
production possibility curve
purpose of a production
➜ discuss the significance of a
possibility curve position within a production
➜ explain the shape of the possibility curve.
production possibility
curve, including the
difference between
constant opportunity costs

②-- and increasing opportunity

costs recommended
decreasing Opp .
Cost
 definition
3

Also known as production

The production di possibility frontier/ PPF

possibility curve (PPC) production possibility

boundary/
shows the max possible
o/p or production of the è it draws a type of
two goods can be boundary between what can
be produced and what cannot
produced in an economy be produced
given the use of a
➜ Can be used to illustrate
particular combination of
the idea of choice and the
resources and tech in a concept of opportunity cost
given time period
 4

introduction
1) 2) 3)
the quality and A simple economic
In any economy,
quantity of factors of
what is produced model, known as a
production production
is determined by determines an possibility curve
the quantity and economy’s
(PPC), can be used
quality of production to show the choices
resources that are possibilities – the available and how
available goods and services it
resources are
can produce with the allocated.
resources it has
available
 5

Assumptions of ppc
1) 2) 3)
Economy is in full Resources The state of tech
employment & full available are fixed does not change
production and limited throughout
all FOR
capacity production. The
are
fully production
utilised
technology
4)
available is being
The country is only fully utilised
producing 2 types of goods Ceteris
peribus
 6
The Production Possibility curve
The PPC has a negative slope (concave),
which indicates a trade-off between
producing one good or another.
-2
· ~PPC label the D .

=
I
Diagram

0 consumer

goods
 7

Points inside of the curve are

inefficient.

empogeta
·

At point H, resources are either

unemployed, or are used
X inefficiently.
X
Economy is producing less than
Waste
it could from the resources
of
resourc available.

· This applies to any other points

that are located within the
production possibility curve
 8

but cannot
-
Posiscarcity
tion
be achieved
of q Point F is desirable because it yields
more of both goods, but it is not
attainable given the amount of resources
available in the economy.
q Economy does not have the resources
inefficiency that are required to achieve this level of
output of both types of good.
q Point F represents a position of scarcity.
 9

ü Point C is one of the possible

combinations of goods produced when
resources are fully and efficiently
employed.
ü It indicates an efficient allocation of
resources è the economy is getting all it
can from the resources available given
the present state of technology.
ü It is clearly sensible and beneficial for the
economy to be producing on its
production possibility curve.
 10

A movement along the curve

illustrates the concept of
opportunity cost.

From point D to C, an increase

- the production of capital goods
requires a decrease in the
amount of consumer goods.
 11

è The end points of the production possibility curve represent the

extreme possibilities of what can be produced.

è In between these extremes, there are many points on the production

possibility curve where other combinations of the two products can be
made while maximising total output

N I product only
 12
The Law of Increasing
Opportunity Cost
è According to economic theory,
successive increases in the production of
one good will lead to an increasing sacrifice
in terms of a reduction in the other good.
èFor example, as an economy tries to
increase the production of good X , such as I
cameras, it must sacrifice more of the other
good, Y, such as mobile phones.

èThis explains why the PPC is concave to

the origin, meaning its is bowed outwards.
èIf an economy initially produces at A, with
8m phones and 10m cameras (to 20m), and 10
then increases output of cameras by 10m, it
must sacrifice 1m phones, and it moves to
point B.
 13
ppc
14
 15

SHAPES OF PPC The shape of the

PPC depends on
➜ Bowed outwards ➜ Straight line ➜ Bowed inwards whether there
(concave) (downward- (convex) are increasing,
- Due to increasing sloping) - Due to decreasing decreasing, or
opportunity costs opportunity costs constant
- Due to constant opportunity
- Resources of one opportunity costs - Resources used
costs.
good may not be - Resources used originally for good
equally for one good A is better suited
productive for the could be easily for Good B
other good transferrable for
- Producing more the production of
of one good leads another good
to giving much - Opportunity costs are
more of the other the same at all level of
goods production
 • 16
• SHAPES OF PPC
Ø the reduction in car's production is matched by a greater
increase in television
Increasing opportunity cost Ø opportunity cost of a fall in car is greater output of television
Ø when the economy reallocates its factors of production from
point A to point B, resources are being moved from the car
industry to the production of televisions 200 cars are being
given up in order to get 300 more television sets.
Ø If the economy is operating at point A, the opportunity cost of
producing 300 more televisions is 200 cars.
Ø The benefit given up from the production of these cars is the
opportunity cost.
Ø For each additional unit of televisions produced, the
opportunity cost of producing televisions gets larger and
larger as the production of cars decreases.
Ø This is a situation of increasing opportunity costs. The two
goods require different factors of production
 17
SHAPES OF PPC

Ø the opportunity cost of switching production from one good to

the other is constant
Ø a fall in production of Good A leads to the same proportionate
increase in Good B
Ø Constant opportunity costs are due to the factors of production
being equally well suited to the production of both goods.
Ø For this to occur, goods require the same factors of production,
for example, where two similar types of sports trainers are
being produced
 18
SHAPES OF PPC

• The resources used for one good might be particularly

well-suited for that good and become even more
efficient as production increases.
• As a result, the opportunity cost of shifting resources to
that good decreases, leading to a decreasing opportunity
cost PPC.
 19
A trade-off between products

v The production possibility curve can be used to show the trade-off

involved in the production of the two products.
v A trade-off is the process of deciding whether to give up some of
one good in order to obtain more of another.
v So, if it is decided that more Good A to be produced, the trade-off is
that, as current resources are being fully used, fewer Good B can be
produced.
v The numerical extent of any trade-off can be obtained from
comparing the increase or decrease in production for each of the
two goods.
 “
Changes in the slope of PPC 20

➜ Slope of PPC will be

changed if there is any
changes in the quantity
and quality of
resources specified to
the production of ONE
type of good
 Shifts of a PPC
Types of shifts:
1. Shift outwards è
indicates an 2. Shift inwardsè
increase in indicates productive
productive capacity capacity has
Factors: decreased
a) Increase in
quality/quantity of Factors:
resources a) war
b) Increase in labour b) natural disaster
force c) earthquake, tsunami
c) Increase in technical à cause destruction of
knowledge available resources
(advancement in
technology)
d) Improving in training
 Shifts of a PPC
Reasons:
1) More resources become available.

è The productive capacity of an economy increases

when more resources become available or when there
is an improvement in the quality of resources used.

è Such a change can come about through an increase

in the factors of production, for example more labour
through immigration, an increase in capital goods or
improved opportunities for enterprise.

è Normally, economies acquire more resources,

although overpopulation can result in fewer resources
being available (a decrease in productive capacity)
 Shifts of a PPC
Reasons:
2) Technological change

ü Advances in technology continue over time and affect

the position of the production possibility curve of an
economy. Where the overall change is positive, then
more of both products can be produced. This is the
normal situation in most economies.

ü There are certain circumstances though where

technological progress may fall, resulting in a
decrease in the production of both products
FACTORS THAT INFLUENCE
THE SHIFT OF PPC
 27
Using the production possibility curve to show choices

v PPC can be used to show the difficult choices that have to be made by many
low-income economies.
v Scarce resources need to be allocated to meeting present needs at the
expense of investing in a range of capital goods that will increase economic
potential in the longer term
 28
Using the production possibility curve to show choices
Ø PPC shows the production of consumer goods is approaching its
maximum, leaving only a small amount of resources for capital
goods. With only a small allocation, new investment in capital
goods is often at best only to replace existing resources.
Ø What is needed to raise economic potential is that a greater
proportion of resources should be given to capital goods in order
to shift the production possibility curve outwards.
Ø A small reduction in the amount of consumer goods produced
from A to B can produce a greater relative increase in the
amount of capital goods from C to D.
Ø The effect of this is to increase the economy’s potential for
economic growth as shown by an outward shift of the
production possibility curve.
 “
29

a
PPC Diagram
construction
A & Alty Aty
construction
projects e-Poc2 +

project I of labours
a -
PP Cl Shift upwards
L >
⑧ capital
E goods
I
>
capital
a
 “
30

of resources

Wastage
.

&
X - shift inwards

I
 31

⑧
L -

employer

L Socso/EPF
- gain
 32

linefficient)
encourage fiscal
-
investment

/ most efficient)

Boost the Sectors/RND/ Reallocate the resources

export
 33

- at a
given time

-
X .

B
-
A
 34

-
↑
Resources

↑ efficiency
2 -

-
 35

-
-

~
Ex
>

-
-

--
-
~ -
- --
 36

-profit .

After effect of Shift

~
if increase input , output 4
 SUB-TOPIC 1.6
CLASSIFICATION OF GOODS
AND SERVICES

• explain the meaning and importance of free

goods and private goods (economic goods)
LEARNING
• explain the meaning and importance of INTENTIONS
public goods
• explain the meaning and importance of
merit goods and demerit goods
• analyse how underconsumption of merit
goods results from imperfect information
in the market
• analyse how overconsumption of demerit
goods results from imperfect information
in the market.
Free market
wopubli good
a

arnet/market failure e
 38
CLASSIFICATION OF GOODS AND SERVICES
 39

Basic condition of scarcity relates to

economics goods and services.

Economics
-

supply
no
are

prices
unlimited
-Does
need
not
FOP
goods and
free goods
-

cost
-
no opportunity to produce
 40

ice cream

book
public beaches Excludability
kit kat calculator Public Park and rivalry

-
 PRIVATE GOODS (ECONOMIC GOODS) : 41

characteristics

• It is possible to exclude some people from using a private

good. This is normally done through charging a price.

Excludability • If the price is not acceptable, then the good will not be
consumed.
• Once a private good has been purchased by one person, it
cannot then be consumed (purchased) by others

• The consumption by one person reduces the availability for

others.
Rivalry • In some ways it seems obvious that when you purchase food,
clothes or a textbook, fewer of these goods are then available
for purchase by others

E.g.:
If you eat a packet of chips, then your friend can’t eat it/ if a firm builds a manufacturing plant on a
piece of land, then the lands is not available for use by local farmers.
 Free goods 42

è have zero opportunity cost since consumption is not limited by

scarcity.

è Free goods have no prices and, in principle, no factors of production

are required to produce them.

èIt is not easy to think of examples.

è In some economies, wild fruit and berries may be gathered or some

non-domesticated animals hunted for their meat.

èThe air we breathe could also be seen as a free good.

èOther examples: rainfall and water in a local river

Free goods 43

Do you think water is a

type of free good?
Li economic
goods
 44
➜ The case of market failure – missing market
➜
PUBLIC GOODS 2 main characteristics of pure public goods:

• Once the good has been provided for one consumer, it is impossible to
Non- stop anyone else from benefiting from the good
excludability

• A public good must be non-rival. As more and more people consume the
good, the benefit to those already consuming the product must not be
Non-rivalry reduced

· funded by government
 45

PUBLIC GOODS

➜ Some goods are public goods in most economies

➜ Fire protection, the police force, national security, street lighting, traffic lights
and flood control systems are all public goods
➜ A government-funded flood control system, by its very nature, is in place for
the benefit of anyone who might be badly affected by flooding. It is non-
rivalrous in the sense that each person living in the vicinity of the flood control
system has the same accessibility to its support.

It is unrealistic to charge individuals for the protection; what happens if

you pay a charge and your near neighbour refuses to pay?
 46

PUBLIC GOODS :

➜ In coastal areas, a lighthouse is an excellent example of a public good. (A

lighthouse is a tall structure with a powerful light that is designed to warn
shipping of dangerous rocks or shallow water).
➜ A lighthouse is non-excludable since the service is available to all vessels in
the area.
➜ It is non-rivalrous since all ships receive the same warning from the
lighthouse’s powerful light beam.
➜ It is impractical to charge individual ships as they pass by the lighthouse.
 47

QUASI PUBLIC GOODS

wifi
ky
➜ Is a near public good
➜ They are like public goods without truly being public goods.
➜ May not posses all the characteristics of a pure public good
i. Semi non-rival à up to a point, a public park can be too crowded that reduces
the space available for othersex :
National Defence

ii. Semi non-excluded à it is possible to exclude some nonpaying consumers to

consume the good
eg: building toll booths for roads, charge public toilets è non-rivalrous
like a public good but excludable like a private good since anyone not
paying the toll is excluded from using it.
 48

QUASI PUBLIC GOODS

➜ Eg: sandy seaside beach.
➜ The beach is available to all those who wish to use it. It appears non-excludable.
➜ However, it is possible to think of ways of excluding consumers from the beach.
➜ Privately owned beaches do this. Equally, the beach is non-rival up to a point. If you are
the first person on a pleasant beach on a warm, sunny day, you may continue to enjoy
the beach as a few more people arrive to enjoy the benefits themselves.
➜ However, as the beach becomes crowded, space limited and other people’s
conversations and music become louder, you may no longer enjoy being on the beach.
The beach has something of the characteristic of non-rivalry, but not the full
characteristic. It is a quasi-public good.
 49
PUBLIC GOODS AND MARKET FAILURE

➜ Pure public goods à cannot be provided by the private sector

because they are unable to supply them with a profit
➜ It is very difficult for a private producer to charge the consumer due
to FREE-RIDER problem
➜ Once provided à everybody benefits from it although some do not
pay for it àend up not being provided by the private sector ->
missing market

➜ Free-rider problem exists when someone who receives the by

Loss Private firms

benefits but allow others to pay for it

 50

The problem caused by public goods

➜ the market may not produce them. There may be a consumer demand
for such products (consumers are willing and able, in principle, to pay
for the product’s services), but the free market may not have a
mechanism for guaranteeing their production.
➜ In the case of a flood control system and a lighthouse, we have hinted
at what is known as the free rider problem associated with the
provision of public goods.
➜ The free rider problem arises where people enjoy the benefits of a
public good without having paid for it. In other words, they take a ‘free
ride’. The problem is due to the non-excludability of public goods
 51

The problem caused by public goods:

eg: non-toll road
➜ funded by the regional government out of taxation.
➜ Anyone who is qualified to drive and who has a vehicle can use it.
➜ No direct user charge at the point of use.
➜ Tourists and non-local people are free to use the road in the same way
as local residents who have contributed to its funding.
➜ If the road was to be provided by a private business, this would still be
the case. Given that a private firm would be seeking to make a profit,
there is no way that it would consider building a non-toll road.
➜ The same argument applies to providing fire prevention and police
services.
 52

toilet
-public
-figcity
-
Public Park -playground
-
c . B ipad - National
Library
-
STD -
vehicle - Public cricket pitch

-National Defense

- Toll road
-
firework display
-Public transpot -fire services
 53

Merit goods, demerit

goods and information
failure
Occurs when people have inaccurate, incomplete, uncertain or misunderstood
data and so make potentially ‘wrong’ choices
The issue whether information failure is trivial or whether it has a huge effect
on individuals, their families and society as a whole

Misunderstanding the true costs or

benefits of a product – the case of
merit and demerit goods
 54

Defined as a good that is better for a person than the person who may consume
MERIT the good realises

GOODS Goods that have benefits for more people than the quantities produced in the
market
↓ Underproduction/ underconsumption exists or is underprovided by the market

example
of Due to lack of perfect information and the positive externalities present
market failure

Eg: health, education, insurance, vaccination -

against contagious
diseases

preventive
healthier ind

For instance, people do not take health insurance if they feel they eat right and
could stay healthy

Another instance, parents may not provide enough education for their children, but
it is the interest of the child to receive the highest quality of education

Require government intervention to reallocate resources in producing more of

these products ->

subsidy
- >
awareness

campaign
 55

DEMERIT Defined as goods that are worse for the individual

GOOD consumer than the individual realises

Goods that have more costs to other people yet are still
being produced in the market

Overproduction/ Overconsumption exists

Due to lack of information and large negative externalities

present negative effects to sociaty

Eg: cigarettes, alcohol, drugs

Effects: increase crime, increase health costs, reduce

value of human capital, distress among family members

Required government intervention to reduce production

and consumption of these products taxation
->
 56
Information failure and underconsumption of merit goods
Information failure
Ø information failure applying to the consumer.
Ø arises because consumers do not recognise how good or bad a particular product is for them: either
they do not have the right information or they simply lack some relevant information. This is why
merit goods are provided by the government for those who are thought to need them.

Ø There is a huge quantity of information on a wide range of products available to consumers on the
internet to help them make informed decisions about what to buy.

Ø In some countries, better labelling on consumer products, such as food, drink and non-prescription
medicines, can help consumers when deciding what to buy.
labelling
Ø For other products, such as tobacco products and medicines, the labelling may contain reasons to
stop or limit the consumption of a product.
to what extent
?
- short an
Ø In principle, the ever-increasing information available to consumers should enable them to take
rational decisions that maximise consumer welfare. Where this happens, the market works
efficiently; if not there will be an inefficient allocation of resources.
 57

where consumers are not aware of the

benefits or the harmful
effects of consuming a particular product
where persuasive advertising results in
Examples consumption levels that are
of
information not in the best interests of consumers
failure
where product packaging makes claims that
are misleading or
inaccurate
where producers know more about a product
than consumers. products
overclaiming
manipulative advertisement
hidden ingredients
 58
Low income and underconsumption of merit goods

~income-tax
Ø Consumers may recognise the benefits of merit goods but lack the disposable income to be able
to afford to buy the goods in the quantity they would like or not at all. This is typically the case
with education and healthcare:

i. All forms of education and training, if successfully completed, should produce benefits to the
individual in terms of improved and new skills, better pay and positive employment prospects.
There are wider benefits to the economy – a better-qualified workforce is an important source of
economic growth and can improve the competitiveness of an economy. Human Capital

ii. A healthy population benefits both individuals and the economy. If people have to pay for access to
doctors, hospitals and medicines, then there will be underconsumption among low-income families.
It is morally wrong that only better-off families can use healthcare services in full; for this reason,
most governments try to provide a minimum level of healthcare for their people.
 59
OVER CONSUMPTION OF DEMERIT GOODS

Ø Consumers may be ignorant of the harmful effects of demerit goods on themselves and on others.
Consumers might be indifferent, choosing not to care. This is particularly true of ‘junk food’ which is
of low nutritional value, readily available, cheap and quick to consume.

Ø In high-income economies especially, adult and child obesity is already a serious problem and
expected to get worse. Obesity can be partly attributed to the overconsumption of fast foods and
high-sugar drinks, especially in low-income households. - >
US

Ø Smoking, especially passive smoking, is another example of a demerit good. Smoking is often no
longer allowed in public places, such as offices and restaurants.
government deenrior
regulation

Ø Governments seek to reduce cigarette consumption by imposing heavy indirect taxes, advertising
restrictions and health warnings and images on cigarette packets. It is not possible to say with
certainty whether these measures are effective, not least because cigarette smoking is still popular
among young people in many countries. The ban on smoking in public places has been more
successful
 60
OVER CONSUMPTION OF DEMERIT GOODS

Ø Some economists argue that there is no such thing as merit goods and demerit goods. They put
forward the view that in health care and smoking, it should be the individual and not the government
who knows what is best for them. This contradicts the underlying assumption that the government
knows better than the individual what is good or bad for them because it has considerable information
at its disposal.

Ø An important question with regard to merit and demerit goods is ‘Who is to say what is ‘good’ or
‘bad’ for a person’?
Ø If an individual consumer makes a decision to consume a product, what right has society to say
that the individual is making a ‘wrong’ decision? If society is able to tell consumers that they do
not fully realise what is good or bad for them, then it follows that ‘society knows best’ and has a
right to make value judgements.
Government intervention
61

2. Demerit goods
1. Merit goods - Ban consumption
- Direct provision by - Taxes on producers
government
- Subsidised provision
- Regulation
- Regulation à government - Advertising campaign
may leave provision to the
private sector but force
consumers to buy merit
goods or producers to provide
a merit good
- Advertising campaign
Eg: car insurance law à compulsory
 62

-
L ·

~
 63

~
~
L

-
C
-

risk of coastal flood .

-
 65

Useful video
https://www.youtube.com/watch?v=JNwhtQS5zoQ