Production Possibilities Curve
What is Production Possibilities Curve?
The Production Possibilities Curve (PPC) is a graphical representation showing the maximum combination of two goods or services that can be produced in an economy with a given set of resources and technology, assuming full and efficient use of those resources.
The PPC illustrates the concept of opportunity cost and trade-offs. Points inside the curve are attainable but inefficient, points on the curve are efficient, and points outside the curve are unattainable. The slope of the PPC represents the opportunity cost of producing more of one good, in terms of the other good forgone. The PPC can shift outward with technological progress or an increase in resources.
Production Possibilities Curve: a worked example
An economy that makes only wheat and steel can produce 100 tons of wheat if it makes no steel. The first ton of steel costs 4 tons of wheat, dropping output to 96; the second ton costs 8 more, down to 88; the third costs 14 more, down to 74. Each extra ton of steel costs more wheat than the last because the resources best suited to growing wheat are the last ones moved over, and that rising cost is exactly what makes the curve bow outward from the origin instead of running in a straight line.
The mistake students make with production possibilities curve
Students treat an economy recovering from a recession, or putting unemployed workers back to work, as an outward shift of the PPC. Returning idle resources to use moves production from a point inside the curve to a point on it, without moving the curve at all. The curve itself shifts only when the quantity of resources or the level of technology changes.
Production Possibilities Curve questions
Why is the production possibilities curve bowed outward?
The production possibilities curve is bowed outward, or concave to the origin, because resources are not equally suited to both goods, so shifting more of them into one good means giving up increasing amounts of the other. A straight-line PPC instead means resources are perfectly interchangeable and opportunity cost stays constant.
What does a point inside the production possibilities curve mean?
A point inside the production possibilities curve means the economy is producing less than its resources and technology allow, which signals unemployed or underused resources. Such a point is attainable but not efficient.
What causes the production possibilities curve to shift outward?
A production possibilities curve shifts outward when the economy acquires more resources or better technology, through routes such as population growth, immigration, net investment in capital, discovery of natural resources, or better education and training. If the improvement applies to only one good, the curve pivots outward along that good's axis while the other intercept stays put.
This is the live Production Possibilities sandbox. Drag the curves, or open the full version.
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