Theme 1: Introduction to markets
and market failure
In this theme, students will consider how markets work, looking at how supply and demand interact to allocate resources in local,
national and international markets. They will learn how to apply supply and demand analysis to real-world situations and be able to
offer explanations of consumer behaviour. This will involve looking at both how consumers act in a rational way to maximise utility and
how
firms maximise profit, but also why consumers may not behave rationally.
1.1 Nature of economics
Subject content
1.1.4 Production possibility frontiers
What students need
to learn:
a) The use of production possibility frontiers to depict:
o the maximum productive potential of an economy
o opportunity cost (through marginal analysis)
o economic growth or decline
o efficient or inefficient allocation of resources
o possible and unobtainable production
b) The distinction between movements along and shifts in
production possibility curves, considering the possible
causes for such changes
c) The distinction between capital and consumer goods
Objectives
• To understand the reasons for shifts and movements on a PPF
• To analyse the production possibility of an economy in given scenarios using diagrams
• To evaluate the impact of the production of capital goods vs consumer goods
Starter
og onto Showbie and complete worksheet allocated to the
group.
Extension
In the longer run, the number of resources used to make both types of
goods increases in Country A. Combination B now becomes attainable
and efficient. Draw another production possibility curve on Figure 2
and label it PPC2 to show this scenario.
3
70 units
80 units
7
Extension
8
What is going on here?
Capital vs
Consumer Goods
How could a country promote
growth? What could it invest
in that would cause growth
in
the
long
term?
Read
through
the article on
Learning space
and jot down ‘why capital investment matters’ in order to
explain why in the long run capital investment is better for growth.
Extension activity: Can you draw a PPF for a country
that has invested heavily in capital goods?
Extension thought: What are the problems with investing heavily in capital goods? Think about trade-offs/
opportunity costs.
Which point do you think is the most efficient
combination of resources to promote growth in an
economy? Why?
• What are the issues short term? What is the
trade off?
R
Q
D
C
P
Consumer
Goods
A
B
P
Capital Goods
Q
R
Private vs Public Activity
Draw a PPF. The vertical axis shows the production of public sector goods and the horizontal axis shows
production of private sector goods. The economy is currently producing at Point A on the frontier where 50%
of all production is devoted to public sector goods and 50% to private sector goods.
a) Mark the following points on your drawing.
i. Point A
ii. Point B which shows production following the election of a government spending on both educations and
the NHS.
iii. Point C where unemployment is present in the economy
iv. Point D where the government takes over production of all goods and services in the economy.
b) Draw another diagram putting on it the original PPF you drew for (a), labelling it AA.
i. Draw a new PPF on the diagram, labelling it PP, which shows the position after a devastating war hit the
economy.
ii. Draw another PPF labelling it QQ which shows an increase in productivity in the economy such that
output from the same amount of resources increases by 50% in the public sector but twice that amount
in the private sector.
Efficiency
Productive Efficiency
Allocative efficiency
Productive efficiency can be defined
as producing goods and services for
the lowest cost. All points are on the
boundary are productively efficient.
Allocative efficiency occurs when
social welfare is maximised. There
could be just one point that does
this.
APPLICATION
APPLICATION
APPLICATION