Production Possibilites curve

Production Possibilities Curve (PPC)

A graph showing how many units of two goods or services an economy can produce if it uses its resources fully and efficiently. || A PPC can show combinations of capital goods and consumer goods.

What does PPC stand for?

Production Possibilities Curve. || A PPC can compare the production of Good A and Good B.

What does a PPC illustrate?

Scarcity, choice, trade-offs, and opportunity cost. || Producing more of one good requires giving up some of another good.

Scarcity

There are not enough resources to satisfy unlimited wants for goods and services. || An economy cannot produce unlimited amounts of both consumer goods and capital goods.

Why does scarcity require choice?

Limited resources cannot be used to produce everything people want, so choices must be made about how resources are used. || Producing more military goods means producing fewer civilian goods.

Trade-off

Producing or consuming more of one thing means producing or consuming less of something else. || Producing more consumer goods may require producing fewer capital goods.

Opportunity Cost

What must be given up when scarce resources are used for one purpose instead of another. || If producing 1 more unit of Good A requires giving up 2 units of Good B, the opportunity cost is 2 units of Good B.

How do you calculate opportunity cost on a PPC?

Find how much of one good is lost when production of the other good increases. || If Good A rises from 1 to 2 while Good B falls from 10 to 6, the opportunity cost is 4 units of Good B.

What does the slope of a PPC show?

The opportunity cost of producing another unit of one good in terms of the amount of the other good that must be given up. || A steeper part of the PPC represents a larger opportunity cost.

Linear PPC

A straight-line Production Possibilities Curve. || A straight PPC shows the same trade-off at every point.

What does a linear PPC represent?

Constant opportunity cost. || Each additional unit of Good A may always cost 2 units of Good B.

Constant Opportunity Cost

The same amount of one good must be given up for every additional unit of the other good. || Moving from 0 to 1 unit of Good A costs 2 units of Good B, and moving from 1 to 2 also costs 2.

What shape does constant opportunity cost create?

A straight-line PPC with no bend. || The trade-off stays the same all along the curve.

Concave PPC

A bowed-out PPC that becomes steeper as more of the good on the horizontal axis is produced. || A typical PPC becomes steeper as production shifts toward one good.

What does a concave PPC represent?

Increasing opportunity cost. || Each additional unit of Good A requires giving up more Good B than the previous unit.

Why is the PPC concave?

Because of the law of increasing opportunity cost. || Producing more military goods requires giving up increasingly larger amounts of civilian goods.

Law of Increasing Opportunity Cost

As more of one good is produced, increasingly larger amounts of the other good must be given up. || Increasing military goods from 2 million to 3 million costs 5 million civilian goods, while increasing from 6 million to 7 million costs 15 million.

Why does opportunity cost increase?

Resources are not equally well suited to the production of all goods. || Some factories are easier to convert from civilian production to military production than others.

What happens to the PPC as opportunity cost increases?

The PPC becomes steeper as more of one good is produced. || Later increases in military production require sacrificing more civilian production.

Zero Opportunity Cost

Producing more of one good without giving up any of the other good. || Good B stays unchanged while Good A increases.

What shape represents zero opportunity cost for Good B?

A horizontal line when Good B is on the vertical axis. || Good B stays at the same level as Good A increases.

Point on the PPC

A production combination that is attainable and uses resources fully and efficiently. || An economy operating directly on its PPC is using its productive resources efficiently.

Point inside the PPC

A production combination that is attainable but below the economy's production potential. || Unemployment or inefficient use of resources can cause production to occur inside the PPC.

What causes an economy to operate inside its PPC?

Unemployment or inefficient use of resources. || Workers and factories may exist but not be fully used.

What does a point inside the PPC show about efficiency?

Resources are not being used fully or efficiently. || The economy could increase production without gaining new resources.

Historical example of a point inside the PPC

The Great Depression of the 1930s. || High unemployment caused the economy to operate below its production potential.

Point outside the PPC

A production combination that cannot be achieved with current resources and technology. || A point beyond the current curve is unattainable at the present time.

Why is a point outside the PPC unattainable?

Current resources and technology are not sufficient to produce that combination. || The economy would need greater productive capacity to reach the point.

How can a point outside the PPC become attainable?

Economic growth can expand production possibilities. || More resources or improved technology can shift the PPC outward.

Economic Growth

An increase in an economy's ability to produce goods and services. || Economic growth is shown by an outward shift of the PPC.

How is economic growth shown on a PPC?

The PPC shifts outward. || The economy moves from a smaller curve to a larger curve farther from the origin.

What can cause economic growth?

Improved technology, better education, or the discovery of new resources. || New technology allows an economy to produce more goods and services.

Improved Technology

A factor that can increase an economy's production possibilities. || More advanced machinery can shift the PPC outward.

Better Education

A factor that can improve productive capacity and contribute to economic growth. || Better-trained workers can help the economy produce more output.

Discovery of New Resources

An increase in available resources that can expand productive capacity. || Discovering new oil or coal can increase production possibilities.

Outward Shift of the PPC

An increase in an economy's production possibilities. || Improved technology allows the economy to produce more of both goods.

Inward Shift of the PPC

A decrease in an economy's production possibilities. || Losing productive resources reduces the amount the economy can produce.

What happens if factors of production decrease?

Production possibilities are reduced and the PPC shifts inward. || A loss of workers, capital, or natural resources lowers productive capacity.

What happens if technology improves in only the consumer-goods industry?

The PPC shifts outward mainly toward consumer goods. || A technological breakthrough in consumer goods increases the maximum amount of consumer goods that can be produced.

What happens if technology or resources improve in both industries?

The entire PPC can shift outward. || New resources and better technology allow more of both goods to be produced.

What happens if production technology becomes worse in all industries?

The PPC shifts inward because productive capacity falls. || Banning modern production techniques would reduce production possibilities.

Capital Goods

Goods used to help produce other goods and services. || Machinery and production equipment.

Consumer Goods

Goods produced for consumption. || Food, clothing, and other goods purchased for current use.

Capital Goods vs. Consumer Goods

Two categories that can be shown on a PPC to illustrate production choices and trade-offs. || Producing more capital goods may require producing fewer consumer goods.

Why might an economy produce more capital goods?

Producing more capital goods can contribute to greater production capacity in the future. || Building more machinery today can help the economy produce more in the future.

Movement Along the PPC

A change in the combination of the two goods being produced while staying on the same curve. || Moving from more consumer goods to more capital goods on the same PPC.

Shift of the PPC

A change in the economy's overall productive capacity. || Better technology shifts the PPC outward.

Movement Along PPC vs. Shift of PPC

Movement along the PPC changes the combination of goods produced, while a shift changes the economy's production possibilities. || Producing more capital goods is movement along the curve, while better technology can shift the curve outward.

Full and Efficient Use of Resources

Using available resources so the economy is producing at its maximum possible level. || A point on the PPC represents full and efficient use of resources.

Inefficient Use of Resources

Resources are not being fully or effectively employed. || A point inside the PPC may occur because labor or capital is unused.

Can an economy produce more of both goods while operating inside the PPC?

Yes, because unemployed or inefficiently used resources can be put to work. || An economy can move from a point inside the PPC toward the curve and increase production of both goods.

Can an economy produce more of both goods while already on the PPC without economic growth?

No, because resources are already being used fully and efficiently. || Producing more consumer goods on the same PPC requires giving up some capital goods.

What would a PPC look like without scarcity of resources?

There would not be a PPC because production would be unlimited and there would be no trade-offs. || With unlimited resources, producing more of one good would not require giving up another.