Production Possibility Curves

Production Possibility Curve

A curve which shows the maximum combination of goods that an economy can efficiently produce

economic models

simplified representations of economic phenomena

ceteris paribus

the isolation of one specific variable, whereby all other variables are made constant

what does anything below the curve represent

inefficiency; though attainable, it is not fully efficient

what does anything above the curve represent

UNATTAINABLE

what does anything along the line represent

the maximum combination of goods that can be sustainably produced; PRODUCTIVE CAPACITY

Imperfect factor substitution

Illustrates that one variable cannot be substituted for another variable, without an opportunity cost

law of diminishing returns

after an optimal level of capacity is reached, the more factors of production that are added, the more minimal the increase in output will be; there are only marginal increases, leading to increasing opportunity cost at the other axis.

productive capacity

the maximum output an economy can produce between two goods

parallel shifts

if the productive capacity of both goods on the x and y axis increase proportionally, the PPC will shift to the right

non parallel shifts

whilst one value will increase, shifting the PPC down the axis, the value on the other axis will stay the same. this results in the curve pivoting around that axis.

consumer goods

goods and services that are purchased by consumers. they have no real impact on increasing productive capacity

capital goods

goods (such as infrastructure, machinery, technology etc) that will increase an economy’s productive capacity in the long run

productive efficiency

where production takes place at the lowest possible cost per unit.

this is anywhere along the line of a ppc curve

allocative efficiency

the point which maximises social welfare, whereby firms and consumers receive their optimal outcome simultaneously.

this is only one point along the curve of a ppc, where consumer demand matches the volume of goods produced.

pareto efficiency

where it is impossible to make one outcome better off without making another one worse off

what causes increases in productive capacity in a PPC

one or more of the four factors of production increasing quality or quantity