Economic Systems and Production Possibility Curves: Question 8

Worked solution

Part (a): Constant opportunity cost and the shape of the PPC

Between combination M (0 tonnes rice, 60 solar panels) and combination N (100 tonnes rice, 40 solar panels), rice output rises by 100 tonnes and solar panel output falls by: $60 - 40 = 20$

So the opportunity cost of increasing rice output from 0 to 100 tonnes is 20 solar panels.

Between combination N (100 tonnes rice, 40 solar panels) and combination O (200 tonnes rice, 20 solar panels), rice output again rises by 100 tonnes, and solar panel output again falls by: $40 - 20 = 20$

The opportunity cost of each 100-tonne increase in rice is the same, 20 solar panels, whether the economy is moving from M to N or from N to O. This constant opportunity cost means the PPC is a straight line, not bowed outward. A bowed-outward (concave) PPC would show a rising opportunity cost as more of a good is produced; a constant opportunity cost instead suggests that the factors of production being switched between rice and solar panels are, in this case, equally well suited to producing either good.

Part (b): Effect of the flood on the PPC

The flood destroys farmland used to grow rice, so the maximum amount of rice the economy could produce (if it devoted all its resources to rice) falls. Because the flood has no direct effect on the resources used to make solar panels, the maximum solar panel output the economy could achieve (combination M, where no rice is grown) stays roughly the same.

The PPC therefore shifts inward, but not uniformly in every direction. It moves inward mainly along the rice axis, becoming steeper/narrower on the rice side, while the solar-panel-axis intercept near combination M is largely unaffected.

Because this is a change in what the economy is capable of producing at all (not a change in how existing, unaffected resources are being used) it is a shift of the curve (representing negative economic growth, i.e. a fall in productive capacity), rather than a movement along a fixed curve.

Part (c): Actual growth versus potential growth in the recovery

Actual economic growth refers to a rise in the real output (goods and services) that an economy actually produces (for example, by bringing previously idle, damaged or underused resources back into production, so the economy’s actual output point moves closer to its PPC. Potential economic growth refers to an increase in the economy’s maximum productive capacity itself, shown by an outward shift of the whole PPC) for example through new resources or new technology.

In the two years after the flood, both rice and solar panel output rise, but total output stays below the pre-flood level, and nothing in the scenario suggests the economy’s maximum productive capacity (its PPC) has shifted outward again (the farmland lost to the flood has not been described as being restored or expanded. This means the rise in output reflects resources (such as workers and remaining farmland) being brought back into fuller, more effective use) the economy’s actual output moving closer to its (currently smaller) PPC. This recovery therefore represents actual economic growth, not potential economic growth.

Final answers

• (a) Opportunity cost of extra rice $=$ 20 solar panels, constant between M$\to$N and N$\to$O, showing the PPC is a straight line (constant opportunity cost)
• (b) The PPC shifts inward, mainly along the rice axis, while the solar panel maximum is largely unchanged. This is a shift of the curve (negative economic growth), not a movement along it
• (c) The recovery is actual economic growth (output moving toward the current, smaller PPC), not potential economic growth (which would require the PPC itself to shift outward)