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.
A movement along the PPC is one thing. A shift of the whole PPC is something different and is caused by changes in the underlying resources or technology.
An outward shift of the entire PPC means the economy can now produce more of both goods at once. This is the textbook definition of economic growth of productive potential.
An inward shift of the entire PPC means the economy can now produce less of both goods. This is economic decline of productive potential.
Anything that raises the quantity or quality of the factors of production, or improves the technology used to combine them.
| Cause | What changes |
|---|---|
| Net inward migration | Quantity of labour rises |
| Capital investment | More machinery, factories, infrastructure |
| Discovery of new natural resources | Quantity of land rises (new oil field, new mineral seam) |
| Improved education and training | Quality of labour rises (more skilled, more productive workers) |
| Better health of the workforce | Quality of labour rises (fewer days lost to illness) |
| New technology | Same resources produce more output per worker / per machine |
| Productivity-enhancing reforms | Better infrastructure, deregulation that frees up factor markets |
Anything that reduces the quantity or quality of factors.
| Cause | What changes |
|---|---|
| War | Capital destroyed; labour lost to combat or displacement |
| Natural disaster | Land or capital destroyed (earthquake, tsunami, flood) |
| Resource depletion | Land falls (oil fields run dry, fish stocks collapse) |
| Mass emigration / brain drain | Quantity and quality of labour falls |
| Pandemic | Labour quality and quantity fall short-term |
| Catastrophic policy failure | Capital and skilled labour fall (hyperinflation, sanctions, civil collapse) |
A reliable real-world example for an outward shift: a country opens a major new copper deposit and begins extracting it. An example for an inward shift: a 2011 tsunami in Japan destroying coastal infrastructure and depressing the country's productive capacity for years.