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To understand how an economy’s production possibilities curve (PPC) can shift inward, we must first understand what a PPC is and what an inward shift in a PPC would mean.
A PPC is a graphic depiction, very much simplified, of an economy’s potential production levels. It shows the various combinations of two kinds of goods that an economy could produce. For example, it could show the possible combinations of consumer goods and capital goods that could be produced. The PPC curve itself shows the maximum possible output that a country can achieve. An inward shift in the curve, then, represents a reduction in the maximum possible output. This means that an inward shift is the same as economic decline.
So, what can cause economic decline? There are two main things. First, an economy could lose resources. If a plague or a war were to kill many people, a country would have fewer resources and less economic potential. If a country relied on mineral wealth and that mineral was running out, its economic potential would decrease as well. Second, an economy could stop working as efficiently as possible. It might have the same amount of resources, but it might stop using them effectively. For example, if two parts of a country came into conflict with one another and stopped cooperating, the country’s overall economic potential would decline.
So, a nation’s PPC can shift inward if it loses resources or if it stops utilizing those resources efficiently.
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