Basic Economic Problem · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 10% of your exam marks.
PPC diagram interpretation appears in roughly half of all Paper 2 sittings; outward shifts and opportunity cost from the diagram are the key mark points.
On the curve, inside the curve, outside the curve. These three cases are the foundation of every PPC exam question.
A point that sits exactly on the curve is productively efficient: every resource is fully employed and is producing as much as it can. There is no waste.
A country with no idle factories, no unemployed workers, and no land sitting fallow is operating somewhere on its PPC. Moving to a different point on the same curve means making a different mix of the two goods, but still at maximum output.
A point inside (below) the curve represents productive inefficiency: some resources are idle, unemployed, or underused.
Inside the curve, the economy is producing less than it could. The same resources could be used to make more of both goods at once. Typical causes:
A move from a point inside the curve to a point on the curve uses no extra resources; it simply uses the existing resources better. There is no opportunity cost for that move because nothing was given up.
A point outside (beyond) the curve is currently unattainable. Given the economy's current resources and technology, that combination of outputs is impossible.
To reach an outside point, the economy needs more resources or better technology; only then does the curve itself shift outward.
A common slip: calling a point outside the curve "inefficient". It is not inefficient; it is impossible with the current PPC. Inefficiency lives inside the curve.
Explaining the significance of production points on a PPC
What comes up: a 4-mark question asking you to explain what it means for a production point to be inside, or on, the PPC.
Write (two marks each): (1) A point inside the curve: output is below the maximum that the economy could achieve (1); some resources are unemployed or used inefficiently, so the same resources could produce more of both goods (1). (2) A point on the curve: output is at its maximum (1); all resources are fully and efficiently employed (1).
Watch out: a point outside the curve is currently unattainable (not inefficient). Never describe it as wasteful or inefficient. Inefficiency belongs inside the curve, where idle resources exist.