Economics 9708/13 — October/November 2020

Background Concept

The production possibility curve (PPC) shows the maximum possible combinations of two goods that an economy can produce given its resources and technology, assuming full and efficient use of resources. Points on the curve represent productive efficiency: to produce more of one good, the economy must produce less of the other (opportunity cost). Points inside the curve represent inefficiency: the economy is not producing at its maximum potential because some resources are unemployed or not used to their full capacity. Points outside the curve are unattainable with current resources and technology.

Understanding the Question

The question asks why a point inside the PPC is described as inefficient. Four options are given:

• A: Individuals are enjoying too much leisure.
• B: More of one good can be produced without decreasing production of another.
• C: The combination of labour and capital is wrong.
• D: There are shortages of some goods and an excess supply of others.

The correct answer must capture the essence of inefficiency in terms of the PPC: the ability to increase output of one good without sacrificing the other.

Approach

Recall that at any point on the PPC, the economy is productively efficient: to increase output of one good, output of the other must fall. Inside the PPC, there are idle resources, so output of one good can be increased without reducing the other. This matches option B. Evaluate the other options:

• A: Enjoying leisure is a choice; it does not necessarily imply inefficiency. The PPC does not measure welfare or leisure.
• C: A wrong combination of labour and capital could cause inefficiency, but it is not the defining reason. Inside the PPC could also be due to unemployment or underutilisation, not just wrong combination.
• D: Shortages and excess supply describe market disequilibrium, not PPC inefficiency. The PPC is about production possibilities, not market outcomes.

Step-by-Step Reasoning

1. Define inefficiency in the context of the PPC: a point inside the curve means the economy is not producing the maximum possible output from its resources.
2. At such a point, there are unemployed resources (e.g., labour, capital) or resources used inefficiently.
3. Therefore, it is possible to increase the output of at least one good without reducing the output of any other good, because the idle resources can be employed.
4. Option B directly states this: "More of one good can be produced without decreasing production of another." This is the correct description.
5. Option A is incorrect because leisure is a normal good; choosing more leisure is a trade-off, not necessarily inefficient. The PPC does not judge the desirability of leisure.
6. Option C is too narrow: a wrong combination of labour and capital might lead to inefficiency, but the point inside could also be due to general unemployment or underutilisation. The statement is not universally true.
7. Option D confuses microeconomic market imbalances with macroeconomic production possibilities. Shortages and excess supply are about prices and quantities in specific markets, not about the overall production frontier.

Key Takeaways

• A point inside the PPC indicates underutilisation of resources (unemployment, inefficiency).
• Inefficiency means that more of at least one good can be produced without sacrificing another good.
• The PPC illustrates productive efficiency, not allocative efficiency or market equilibrium.

Common Mistakes

• Confusing a point inside the PPC with a point outside (unattainable).
• Thinking that any point not on the curve is inefficient (points outside are unattainable, not inefficient).
• Associating inefficiency with market shortages or surpluses (these are about price mechanisms, not production possibilities).
• Believing that enjoying leisure is always inefficient (leisure is a choice; the PPC does not measure welfare).

Things to Be Careful About

• The PPC shows maximum output combinations under full employment; inside means less than full employment.
• Inefficiency in this context is about productive efficiency, not allocative efficiency.
• The ability to produce more of one good without less of another is the key test of inefficiency on a PPC.