IGCSE Economics 0455: Interpreting Points on a Production Possibility Curve

The small island economy of Palmares uses all of its workers and equipment to produce just two goods: fish (measured in tonnes per year) and solar panels. A production possibility curve (PPC) for Palmares shows the maximum combinations of fish and solar panels it can produce in a year when all of its resources are fully and efficiently employed.

Three possible combinations of output for Palmares are:

Point P: exactly on the curve, 800 tonnes of fish and 300 solar panels.
Point Q: inside the curve, 500 tonnes of fish and 200 solar panels.
Point R: outside the curve, 800 tonnes of fish and 400 solar panels.

(a) Explain what point Q shows about the way Palmares is currently using its resources. [2]

(b) Explain why point R is not currently attainable for Palmares. [2]

(c) Palmares is initially producing at point P. It then reallocates resources along the same PPC to produce 350 solar panels instead of 300, and as a result fish output falls from 800 tonnes to 770 tonnes. Calculate the opportunity cost of one extra solar panel, in tonnes of fish forgone, and explain what your answer shows about the reallocation. [3]

Part (a): Interpreting point Q, inside the PPC

Point Q (500 tonnes of fish, 200 solar panels) lies inside Palmares’ PPC. Every point inside the curve is attainable, but it means Palmares is not using its resources fully or efficiently (for example, some workers or equipment may be unemployed, or resources may be poorly organised. Because resources are not being used to their full potential at point Q, Palmares could move to a point with more of both fish and solar panels (for example, up to point P) without needing any additional resources at all) simply by employing its existing resources fully and efficiently.

Part (b): Why point R is not currently attainable

Point R (800 tonnes of fish, 400 solar panels) lies outside (beyond) Palmares’ current PPC. The PPC shows the maximum combinations of fish and solar panels attainable with the resources Palmares currently has, so any point beyond the curve is, by definition, not attainable right now. For Palmares to reach point R, it would need an increase in the quantity or quality of its factors of production (for example, more workers, more fishing boats, or better solar-panel manufacturing technology) which would shift the whole PPC outward. Until that happens, point R remains out of reach.

Part (c): Opportunity cost of the reallocation along the PPC

Moving from point P to the new combination is a movement along the same PPC, since Palmares’ total resources have not changed. It is simply reallocating existing resources from fishing towards solar-panel production.

Extra solar panels produced: $350 - 300 = 50 \text{ extra solar panels}$

Fish given up: $800 - 770 = 30 \text{ tonnes of fish}$

Opportunity cost per extra solar panel: $\frac{30}{50} = 0.6 \text{ tonnes of fish}$

So each extra solar panel produced costs Palmares $0.6$ tonnes of forgone fish. This confirms that, even along a fixed, unchanged PPC, producing more of one good is never “free”. Resources moved into solar-panel production are resources no longer available for catching fish, so more solar panels can only be gained by giving up some fish.

Final answers

(a) Point Q is inside the PPC: resources are unemployed or used inefficiently, so more of both goods could be produced without any new resources.
(b) Point R is beyond the current PPC, so it is unattainable without an increase in the quantity or quality of Palmares’ resources (economic growth).
(c) The opportunity cost of one extra solar panel is 0.6 tonnes of fish, showing that moving along the PPC still involves a real trade-off between the two goods.