IB Economics SLTopic 1 — Introduction to EconomicsPaper 1 & 2Core skill~10 min read
The Production Possibilities Curve
Scarcity, choice and opportunity cost are three ideas. The PPC is all three on a single diagram, and it is the first model you will be asked to draw under exam conditions. Get comfortable with it now, because it comes back in growth, in unemployment and in the macro papers.
📚 What you need to know
The PPC shows the maximum output a country could produce of two goods if it used all its factors of production.
Points on the curve are productively efficient. Points inside are inefficient. Points outside are unattainable with current resources.
Moving along the curve shows opportunity cost: more of one good means less of the other.
The model assumes only two goods, scarce resources, efficient production and fixed technology.
A straight PPC shows constant opportunity cost. A bowed-out PPC shows increasing opportunity cost.
The whole curve shifting outwards is economic growth; shifting inwards is economic decline.
What the diagram shows
The Production Possibilities Curve is an economic model of the maximum possible output a country can generate if it uses all of its factors of production to make just two goods or services. Any two will do, but most PPC diagrams use capital goods and consumer goods:
Capital goods are assets that help a firm or a country produce output later — a robotic arm in a car factory.
Consumer goods are end products with no future productive use — a watch.
Point E is the interesting one: the economy is producing something, but it could have more of both goods without any new resources at all.
Efficiency, inefficiency and what is out of reach
At A every resource goes into consumer goods: 400 of them, and no capital goods at all.
At B every resource goes into capital goods: 250 of them, and nothing for consumers.
At C and D the economy is using its resources fully. Both points sit on the curve, so both are productively efficient.
At E the economy is inside the curve. Resources are being wasted or left idle — unemployment is the usual reason.
At F the economy is outside the curve. With today’s resources and technology that output is unattainable.
Opportunity cost along the curve
To make one more capital good, this economy must give up some consumer goods. There is no way round it, because the resources are limited. Moving from C (240, 200) to D (320, 150):
Reading opportunity cost off the diagram
gain 80 consumer goods → give up 50 capital goods
A movement along the PPC happens whenever an economy changes how it allocates the resources it already has. Nothing new has been added; the resources have simply been pointed somewhere else.
Get the language right and you protect several marks. A movement along the curve is a reallocation of existing resources. A shift of the curve is a change in the quantity or quality of resources. Using “shift” when you mean “movement” is the fastest way to lose a mark on this topic.
Assumptions of the model
The PPC is a snapshot of an economy at one moment, and like every model it rests on assumptions:
Only two goods are produced. Real economies produce thousands, but two is what makes the diagram drawable.
Resources are scarce. The factors of production are limited, so choices have to be made.
Production is efficient. No waste, and maximum output is squeezed from every input. In reality this is often not true.
Technology is fixed. The model freezes one moment in time. In reality technology keeps improving, which raises what the same resources can produce.
Constant versus increasing opportunity cost
The shape of the curve is not decoration. It tells you how easily the factors of production can switch between the two goods.
Cotton and sewing machines make either a t-shirt or a hoodie equally well. The skills that build a washing machine do not transfer to designing a robotic arm.
Constant opportunity cost happens when the factors used to make one good can be switched to the other with no loss at all. One unit given up buys exactly one unit gained, so the PPC is a straight line. T-shirts and hoodies use the same cotton, the same machines and the same workers.
Increasing opportunity cost happens when the factors cannot switch perfectly. One unit given up buys less than one unit gained, and the PPC bows outwards. The further you push towards one axis, the worse the exchange rate gets, because you start dragging in resources that are badly suited to that job.
Look back at the first diagram to see this. Going from B (0, 250) to C (240, 200) costs 50 capital goods and gains 240 consumer goods. Going from C to D costs the same 50 capital goods but gains only 80 consumer goods. Same sacrifice, far smaller reward — that is increasing opportunity cost.
Shifts: growth and decline
A movement along the curve is one thing. The entire curve can also move.
The solid blue curve is where the economy starts. Both dashed curves are new sets of possibilities, not new choices within the old ones.
Economic growth is an increase in the productive potential of an economy, shown by the whole curve shifting outwards. More consumer goods and more capital goods become possible using all available resources. It is caused by a rise in the quantity or quality of the factors of production:
Better quality: training and education make labour more productive, so the same number of workers produce more.
Greater quantity: a change in migration policy that brings more workers into the economy raises what can be produced.
Economic decline is the reverse: anything that reduces the quantity or quality of the available factors pulls the curve inwards. A major natural disaster that destroys infrastructure and capital does exactly this, and the effect on production possibilities can last for years.
Worked examples
WORKED EXAMPLE
An economy moves from point C (240 consumer goods, 200 capital goods) to point D (320, 150). Calculate the opportunity cost, and state what kind of change this is. [3]
Step 1: what was gained320 − 240 = 80 more consumer goodsStep 2: what was given up200 − 150 = 50 capital goodsStep 3: state it as an opportunity costThe opportunity cost of 80 more consumer goods is 50 capital goodsStep 4: name the change
This is a movement along the PPC, because existing resources have been reallocated. Nothing has been added to the economy.
Always say which direction the trade runs. “Gained 80, cost 50” with no labels earns nothing.
WORKED EXAMPLE
Using a PPC diagram, explain the difference between a country producing inside its curve and a country whose curve has shifted inwards. [4]
Inside the curve
The resources still exist but are not all being used. Typical cause: unemployment, or capital sitting idle.
potential unchanged, output below potentialCurve shifted inwards
The resources themselves have been reduced in quantity or quality, so the maximum possible output has fallen.
potential itself has fallenWhy the distinction matters
A country inside its curve can recover simply by putting existing resources back to work. A country whose curve has shifted in must rebuild or replace resources first.
Inside = wasted potential. Shifted in = lost potential.
💡 Exam tip
Label both axes and every point you refer to. An unlabelled diagram scores badly no matter how neat it is.
Movement along versus shift. Reallocation of existing resources versus a change in the resources themselves. Say which one you mean.
Read opportunity cost as a pair of numbers, and name both goods: “80 more consumer goods at a cost of 50 capital goods”.
Explain the bowed shape by saying factors of production are not perfectly substitutable between the two goods.
Use point E for unemployment whenever a question asks what productive inefficiency looks like.
Attack the assumptions for evaluation marks: fixed technology and perfect efficiency are the two that most obviously fail in reality.
⚠️ Common mix-up
Saying a point outside the curve is “inefficient”. It is unattainable. Inefficient means inside.
Drawing the PPC as a straight line by default. Straight means constant opportunity cost, which only applies when resources switch perfectly.
Calling a movement along the curve economic growth. Growth needs the whole curve to shift out.
Thinking a point on the curve is the “best” point. Every point on it is efficient; which one is best is a value judgement about what society wants.
Forgetting that capital goods pay off later. Choosing more capital goods today usually means faster growth tomorrow — a useful evaluation point.
Treating unemployment as a shift. Unemployed workers still exist, so the curve has not moved. The economy is producing inside it.
Up next: The Circular Flow of Income — the second model of this topic, and the one that shows how money keeps moving between households and firms.
Want this explained one-to-one?
Book a free session with an experienced IB Economics tutor and get your trickiest topics made simple.
