Production Possibility Curve

• The Production Possibility Curve (PPC) shows the maximum possible combinations of 2 goods a country can produce given a constant state of technology and that its limited resources are fully employed
• Points on the PPC are attainable output and show effective utilization of resources
• While all points on the PPC are productively efficient, only one point on the PPC is allocatively efficient, which occurs when the economy is efficient and produces goods that bring the greatest satisfaction to society
• Points inside the PPC are attainable but inefficient output combinations as the economy does not make efficient use of available resources, leading to wastage of idle resources and potential unemployment or inefficiency
• Points beyond the PPC are desired but unattainable output combinations due to scarcity of resources, indicating insufficient resources and technology to produce
• A country can consume beyond its PPC when it trades with other countries, benefiting all countries if each specializes in different goods with lower opportunity cost
• The slope of the PPC measures the opportunity cost to the economy, tending to be downward sloping due to scarcity of resources
• The PPC is usually concave to the origin, implying increasing opportunity cost as resources are imperfect substitutes for each other
• If a point moves from inside to the curve, there is no opportunity cost; if it moves along the curve, there is an opportunity cost
• If an economy is operating on the PPC, it can only increase the production of both goods if there are improvements in technology, an increase in available resources, or an increase in labor productivity
• Economies strive to move to combinations on the PPC as they are deemed efficient, requiring raising production of goods and services to achieve more economic growth
• Factors that can lead to the production of more goods and services:

  • Lower cost of production due to falling prices of factors of production or subsidies by the government
  • Optimism of firms about the future leading to increased production
  • Increased consumer spending due to higher consumer income or more available loans
  • Rising demand for goods by foreign customers (exports) due to rising affluence
• Scarcity is shown by the downwards slope of the PPC, where more of one good leads to less production of another
• Scarcity is also shown by the points beyond the PPC that are unattainable
• Choice is shown by the various points on the PPC and by movement along the PPC
• Opportunity cost is shown by the negative slope of the PPC
• Increasing opportunity cost is shown by the concave shape of the PPC as one good has to be forgone for another