Section A: Key terms and recall
Define the term 'production possibility curve' (PPC). [2 marks]
Show model answer
A production possibility curve (PPC) is a diagram that shows the different combinations of two goods or services that an economy can produce if all its resources are used efficiently. [2 marks]
What does a point inside the PPC represent? [1 mark]
Show model answer
A point inside the PPC represents underutilisation of resources, meaning the economy is not producing at its maximum potential. [1 mark]
What does a point on the PPC represent? [1 mark]
Show model answer
A point on the PPC represents the efficient use of resources, meaning the economy is producing at its maximum potential. [1 mark]
What does a point outside the PPC represent? [1 mark]
Show model answer
A point outside the PPC represents an unattainable combination of goods or services, meaning the economy cannot produce that combination with its current resources and technology. [1 mark]
Explain what a movement along the PPC shows. [2 marks]
Show model answer
A movement along the PPC shows a change in the combination of goods or services produced, assuming that all resources are used efficiently. This can occur due to a reallocation of resources from one use to another. [2 marks]
Section B: Applying your knowledge
Draw a PPC showing the production possibilities for an economy that can produce either 10 units of Good X or 20 units of Good Y, or any combination in between. [2 marks]
Show model answer
The PPC should be a straight line from the point (10, 0) to the point (0, 20), showing the different combinations of Good X and Good Y that the economy can produce. [2 marks]
If the economy is currently producing 5 units of Good X and 10 units of Good Y, what type of point is this on the PPC? [1 mark]
Show model answer
This point is on the PPC, representing efficient use of resources. [1 mark]
If the economy wants to produce more of Good X, what must it give up? [2 marks]
Show model answer
To produce more of Good X, the economy must give up some production of Good Y. This is shown by a movement along the PPC from a point with a higher quantity of Good Y to a point with a higher quantity of Good X. [2 marks]
If a new technology is introduced that increases the production of Good Y, how will this affect the PPC? [2 marks]
Show model answer
The PPC will shift outward to the right, showing that the economy can now produce more of Good Y for any given level of production of Good X. [2 marks]
If the economy experiences a natural disaster that destroys some of its resources, how will this affect the PPC? [2 marks]
Show model answer
The PPC will shift inward to the left, showing that the economy can now produce less of both goods for any given level of production. [2 marks]
Section C: Explain and analyse
Explain why a PPC is usually bowed outwards. [4 marks]
Show model answer
A PPC is usually bowed outwards because of the law of increasing opportunity costs. As more of one good is produced, the opportunity cost of producing an additional unit of that good increases. This is because resources are not perfectly adaptable to different uses, and some resources may be better suited to producing one good than another. [4 marks]
Analyse the factors that could cause a shift of the PPC to the right. [6 marks]
Show model answer
Factors that could cause a shift of the PPC to the right include: - An increase in the quantity or quality of resources, such as labour, capital, or land. - Advances in technology that make production more efficient. - Improved management or organisation of production. - Increased investment in human capital, such as education or training. - A favourable change in the terms of trade, allowing the economy to specialise in the production of goods for which it has a comparative advantage. Each factor should be explained in terms of how it increases the economy's productive potential, allowing it to produce more of both goods. [6 marks]
Section D: Challenge
Consider an economy that produces two goods, Good A and Good B. The PPC for this economy is bowed outwards. Explain why the opportunity cost of producing an additional unit of Good A increases as more of Good A is produced. [6 marks]
Show model answer
The opportunity cost of producing an additional unit of Good A increases as more of Good A is produced due to the law of increasing opportunity costs. This is because resources are not perfectly adaptable to different uses, and some resources may be better suited to producing Good B than Good A. As more of Good A is produced, the economy must use resources that are less well-suited to producing Good A, and more of these resources must be used to produce an additional unit of Good A. This means that the economy must give up more of Good B to produce an additional unit of Good A, so the opportunity cost of producing Good A increases. [6 marks]