Production Possibility Curve - Commerce PDF Download

What is a production possibility curve?

It is a curve that shows the maximum combination of two output that can be produced in an economy if all economic resources are fully and efficiently utilsed. Consider an imaginary economy where there is no one who is unemployed, all the capital equipments in the factories are employed and operating at its full capacity, no lands left and all have been used up to build houses, factories, shopping malls and parking lot and natural resources are almost dried up. This is the situation where a country can land on the PPC

However, in practice this is not possible. Therefore what an economy can best do is to make sure all the productive resources are employed in the most efficient way and hence can operate close to the boundary. Sometimes, the word 'curve' is replaced with frontier which basically means the same (e.g. PPF).

2. How can the tsunami be related with PPC? 

Such natural disaster will destroy factors of production like land, labour and capital. Land flooded with salt water will cause the soil to be contaminated with high levels of saline thus causing it to be no longer suitable for cultivation. Casualties will reduce the quantity of workforce and destruction of buildings and capital equipments will have impact onto total output that can be produced within the economy

In the short to medium term, Japan's PPC will shift inward. The logic is, even if Japan makes full use of its remaining productive resources, there is no way where they can still produce the same maximum combination of output as before.