An economy contains just two sectors, an agricultural sector and an industrial sector.
With the help of a diagram, explain how a production possibility curve (PPC) can be used to show
the concept of opportunity cost and consider whether opportunity cost is likely to remain constant if
resources are reallocated from the agricultural sector to the industrial sector. [8]
The production possibility curve (PPC) is a graphical representation of the maximum possible
combination of two goods or services that an economy can produce, given the available resources
and technology at a speci c time.
In this case, the PPC will demonstrate the trade-o s between agricultural output and industrial
output. as in shown in the diagram, the vertical axis represents the quantity of agricultural products,
while the horizontal axis will represent the quantity of industrial output. To demonstrate the concept
of opportunity cost, let's assume the economy is initially producing at point A on the PPC, fully
utilizing of resources.
agricultural
utput
to
200
100
y output
industrial
100
Moving along the PPC involves reallocating resources from one sector to another. As resources are
shifted from agriculture to industry, the economy becomes more specialized in producing industrial
goods. The opportunity cost comes into play because to produce more industrial products, the
economy must sacri ce the production of agricultural goods.
When the economy moves from point A to point B along the PPC, it indicates that more resources
have been directed towards the industrial sector. As a result, the production of industrial goods
increases by, for example, 100 units but the production of agricultural goods decreases by 50 units.
The slope of the PPC represents the opportunity cost of each additional unit of industrial goods
produced, measured by the sacri ce of agricultural goods. Initially, as resources are reallocated from
agriculture to industry, the opportunity cost may remain relatively low. This is because the economy
will likely use resources that are most suited for industrial production but were previously allocated to
agriculture such as infertile land, college professors and IT engineers, resulting in a smooth shift
along the PPC.
However, as the economy continues to reallocate more resources from agriculture to industry, the
opportunity cost is likely to increase. This is shown by moving from point C to point D. A further
increase in industrial output by 100 units requires giving up 200 units of agricultural output, indicating
increasing opportunity cost. At this point, the economy will have to reallocate resources that were
previously more e cient in agriculture such as fertile land, farmers and agricultural machinery
(tractors and combine harvesters), leading to a steeper trade-o between the two sectors.