Final answer:
A reduction in productive capacity on a production possibilities curve indicates an inward or leftward shift, showing that the economy can produce less of one or both goods or services than before due to decreased resources or technological efficiency.
Step-by-step explanation:
On a production possibilities curve (PPC), a reduction in productive capacity signifies an inward or leftward shift. This shift indicates that the economy or business can produce less of one or both goods or services than it could before, due to the scarcity of resources or a decrease in technological efficiency.
When considering productive efficiency and allocative efficiency, a PPC helps to understand the trade-offs and opportunity costs of producing different combinations of goods.
An efficient organization operates with lower cost and no waste. However, when there's a decrease in capacity, perhaps due to lower technology levels or reduced resources, the new PPC will reflect lower levels of potential production, implying that to continue producing one good at the same level, even more of the other good must be sacrificed than before.
The shift in the PPC reflects how the trade-offs and opportunity costs of producing certain goods and services change over time with varying capacities.