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Factors of Production and the PPC Diagram: Question 4

Syllabus 1.4

Structured 8 marks

Some years after the situation described above, Palmares experiences two separate events.

Event 1: An economy-wide training scheme improves the general skills of Palmares' entire workforce, including both those who catch fish and those who manufacture solar panels, and improved shipping links let the island import better tools and machinery used in producing both goods.

Event 2: A fire severely damages Palmares' main solar-panel factory, destroying most of the specialised equipment used only in manufacturing solar panels, while the size and skill of the fishing workforce, and the boats used to catch fish, are unaffected.

(a) Explain the effect of Event 1 on Palmares' production possibility curve. [4]

(b) Explain the effect of Event 2 on Palmares' production possibility curve, and explain why this effect is different from a uniform inward shift of the whole curve. [4]

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Worked solution

Part (a): Event 1, an outward shift of the whole PPC

Event 1 raises both the quality of labour (a better-trained, more productive workforce across the whole economy) and the quality of capital (improved tools and machinery, imported thanks to better shipping links). Crucially, these improvements are not specific to just one good, they benefit the workers and equipment used in both fishing and solar-panel manufacturing.

Because Palmares can now produce more of both fish and solar panels than before, at every possible combination, the whole PPC shifts outward (to the right): the maximum amount of fish attainable increases, and the maximum number of solar panels attainable increases too. An outward shift of the PPC like this is what economists mean by economic growth, an increase in the economy’s productive capacity, caused here by an increase in the quality of Palmares’ factors of production.

Part (b): Event 2. A pivot, not a uniform inward shift

The fire destroys capital that is used only in solar-panel manufacturing. It does not affect the resources used to catch fish at all. This means:

  • The maximum number of solar panels Palmares could produce, if it devoted all its resources to solar panels, falls, because some of the specialised equipment needed to make them has been destroyed.
  • The maximum amount of fish Palmares could produce, if it devoted all its resources to fish, stays exactly the same, because the fishing workforce, boats and fishing-related capital are completely unaffected.

Because only one end of the curve is affected, the PPC does not shift inward uniformly, as it would if, say, a resource used across the whole economy were lost. Instead, it pivots inward: the fish-axis intercept remains unchanged, while the solar-panels-axis intercept moves closer to the origin. Combinations that used relatively more of the destroyed solar-panel equipment are affected the most, while combinations close to producing only fish are barely affected at all.

Final answers

  • (a) Event 1 shifts the whole PPC outward (economic growth), because it raises the quality of labour and capital used in producing both goods.
  • (b) Event 2 does not cause a uniform inward shift; it causes the PPC to pivot inward, with the fish-axis intercept unchanged and the solar-panels-axis intercept moving inward, because the destroyed capital is specific to solar-panel production only.