Introduction to Economics
Senior 4 · Economics
Introduction to Economics
Lesson 3 of 3
22 min
Every choice you met in the first two lessons — a tailor’s afternoon, a government’s billion francs, a nation deciding what to produce — can be drawn as a single, powerful picture. The production possibility frontier is the first proper model in this course, and it turns the abstract idea of scarcity into a curve you can read off. With it you can show opportunity cost, unemployment, efficiency and economic growth all on one diagram. Before that, though, you need to know exactly what an economy uses to produce anything at all: its resources, which economists call the factors of production.
Everything produced is made by combining four kinds of resource — the factors of production. Each earns a reward for its owner:
Note carefully what capital means here. To an economist, capital is physical — the oven, the sewing machine, the delivery motorbike. The money used to buy them is not capital in this sense; money is finance, a claim on resources, not a resource that itself produces anything. Confusing the two is the single most common error in this topic.
Imagine an economy that, to keep the model simple, produces only two goods: coffee (an export crop) and maize (food). It has a fixed quantity of resources and a fixed level of technology. The production possibility frontier (PPF), also called the production possibility curve, shows the maximum combinations of the two goods the economy can produce when all its resources are used fully and efficiently.
Here is a possible schedule for this economy:
| Combination | Coffee (tonnes) | Maize (tonnes) |
|---|---|---|
| A | 0 | 30 |
| B | 20 | 28 |
| C | 40 | 24 |
| D | 60 | 18 |
| E | 80 | 10 |
| F | 100 | 0 |
At A the economy grows only maize; at F only coffee; the rows in between are the trade-offs. If you plotted these six points and joined them, the line would bow outwards from the origin — a shape we explain below.
Because a point on the curve is already efficient, producing more coffee means producing less maize — so you can read opportunity cost straight off the schedule.
Worked example
The economy is at C (40 coffee, 24 maize) and wants to move to D (60 coffee). What is the opportunity cost?
Step 1 — read the change in coffee. Coffee rises from 40 to 60, a gain of 20 tonnes.
Step 2 — read the change in maize. Maize falls from 24 to 18, a loss of 6 tonnes.
Step 3 — state the opportunity cost. The opportunity cost of the extra 20 tonnes of coffee is the 6 tonnes of maize forgone.
Work out the cost of each successive 20-tonne block of coffee from the table:
Each extra block of coffee costs more maize than the block before. This is the law of increasing opportunity cost, and it is why the curve bows outwards rather than being a straight line. The reason is that resources are not equally suited to both goods. The first land switched into coffee is the land best suited to coffee and least to maize, so little maize is lost. As coffee expands, land that was excellent for maize has to be dragged over too, and each transfer sacrifices more and more maize.
The PPF is drawn for a fixed stock of resources and technology. Change those and the whole curve moves. If the economy gains more resources (a larger workforce, newly irrigated land) or better technology (higher-yield seeds, better machines), it can produce more of both goods, and the frontier shifts outwards — this is economic growth. A disaster that destroys resources shifts the curve inwards.
One trade-off drawn on the PPF matters more than any other for a country’s future: the split between consumer goods (for enjoyment now, such as food and clothing) and capital goods (machines, roads, factories that produce future output). An economy that chooses more capital goods today sacrifices some present consumption, but the extra capital raises its productive capacity, shifting its PPF outwards faster in future. Choosing more consumption now means slower growth later. This is the deep reason investment matters for development.
Tip
Exam technique. Label PPF diagrams precisely. A point inside the curve is not a choice about what to make — it means resources are unemployed. A point outside is unattainable now. Only an outward shift of the whole curve is economic growth; a move along the curve is merely a change in what is produced. And whenever a question mentions ‘capital’, check that it means a machine or a road, not money.
Use the coffee-and-maize schedule from the lesson where needed.
Classify each as land, labour, capital or enterprise: (i) a fishing net used on Lake Kivu; (ii) the fish in the lake; (iii) the woman who organises the fishing crew and takes the risk.
The economy moves from B (20 coffee, 28 maize) to D (60 coffee, 18 maize). What is the opportunity cost, in tonnes of maize?
The economy is producing 40 tonnes of coffee and 15 tonnes of maize. Is this point on, inside or outside the frontier, and what does it tell you about the use of resources?
A country discovers a new high-yield maize seed that works on all its farmland. What happens to its PPF, and what is this called?
(i) the net is capital — a man-made aid to production. (ii) the fish are land — a natural resource. (iii) she is providing enterprise — organising the factors and bearing the risk.
Coffee rises from 20 to 60 (a gain of 40 tonnes); maize falls from 28 to 18. The opportunity cost is the maize given up: 28 − 18 = 10 tonnes of maize.
On the frontier, combination C pairs 40 tonnes of coffee with 24 tonnes of maize, so producing only 15 tonnes of maize alongside 40 tonnes of coffee is inside the frontier. The economy is inefficient: resources are idle — unemployed labour or unused land — because it could have 9 more tonnes of maize with no loss of coffee.
Better technology raises what the same resources can produce, so the whole frontier shifts outwards. This is economic growth. (Because the seed improves maize most, the curve may swing out further on the maize axis than on the coffee axis.)
Summary — the ideas to carry forward
