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Technology is the technical The other source of economic growth is improved technology , the technical means
means for producing goods and for the production of goods and services. Suppose Alexis figures out a better way either
services. to catch fish or to gather coconuts — say, by inventing a fishing net or a wagon for
transporting coconuts. Either invention would shift her production possibilities curve
outward. However, the shift would not be a simple outward expansion of every point
along the PPC . Technology specific to the production of only one good has no effect
if all resources are devoted to the other good: a fishing net will be of no use if Alexis
produces nothing but coconuts. So the point on the PPC that represents the number
of coconuts that can be produced if there is no fishing will not change. In real-world
economies, innovations in the techniques we use to produce goods and services have
been a crucial force behind economic growth.
Remember, economic growth means an increase in what the economy can produce.
What the economy actually produces depends on the choices people make. After her
Fuse/Getty Images production possibilities expand, Alexis might not choose to produce both more fish

and more coconuts; she might choose to increase production of only one good, or she
might even choose to produce less of one good. For example, if she gets better at catch-
ing fish, she might decide to go on an all-fish diet and skip the coconuts, just as the
introduction of motor vehicles led most people to give up horse-drawn carriages. But
even if, for some reason, she chooses to produce either fewer coconuts or fewer fish
than before, we would still say that her economy has grown, because she could have
produced more of everything.
If an economy’s production possibilities curve shifts inward, the economy become
smaller. This could happen if the economy loses resources or technology, as could

result from war or natural disaster. Figure 1.2-4 shows what could happen if a hur-
ricane destroyed some of the trees and fishing nets on the island. If Alexis’s produc-
tion is initially at point A (20 fish and 25 coconuts), the storm could drive production
down to point F (15 fish and 20 coconuts). Point F lies inside the original curve, so the
shrinkage of the economy is shown as an inward shift of the production possibilities
curve.

FIGURE 1.2-4 A Shrinking Economy

Quantity of
coconuts
35
30
A
A shrinking economy results in 25
an inward shift of the production 20 F
possibilities curve because produc-
tion possibilities have diminished. 15
The economy cannot produce as
much of either good as it could 10
before. For example, if production
starts at point A (20 fish and 25 5 New Original
coconuts), after the shrinkage pro- PPC PPC
duction could move to point F (15 0 10 15 20 30 40
fish and 20 coconuts). Quantity of sh

The production possibilities curve is a very simplified model of an economy, yet it
teaches us important lessons about real-life economies. It gives us our first clear sense
of what constitutes economic efficiency, it illustrates the concept of opportunity cost,
and it shows what economic growth is all about.

16 Macro • Unit 1 Basic Economic Concepts
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

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