Production possibilities curve

(PPC)

HS201

Introduction

Production possibilities curve

(PPC) or transformation curve is
a graph that shows the different
quantities of two goods that an
economy could efficiently produce
with limited productive resources.

What PPC/PPF illustrates

A curve that illustrates -the alternative combinations of
two goods that an economy can produce with given
resources and technology.
A PPC represents the boundary or frontier of the
economy's production capabilities, hence it is also
frequently termed as a PPF.
As a frontier, it is the maximum production possible given
existing (fixed) resources and technology.

The production possibilities curve

Graph 1

Within and outside the PPC

Producing on the curve
means resources are
fully employed, while
producing inside the
curve means resources
are unemployed.
In this example, some
factors of production
are suited to producing
both wine and grain,
but as the production of
one of these
commodities increases,
resources better suited
to production of the
other must be diverted.

What is New in PPC

Points along the curve describe the
trade-off between the two goods.
The curve illustrates that increasing
production of one good reduces
production of the other good.
Transferring resources away from the
other good reduces production of that
good.

The Shape of PPF illustrates

The shape of the PPF illustrates the principle of
increasing cost.
As more of one product is produced, increasingly larger
amounts of the other product must be given up.
So the opportunity cost increases as one moves toward
either extreme on the curve of production possibilities.

Opportunity Cost
Opportunity cost is the value of the next best
choice that one gives up when making a
decision
Opportunity cost, or economic cost, is the
cost of something in terms of an opportunity
forgone (and the benefits which could be
received from that opportunity), or the most
valuable forgone alternative (or highest-valued
option forgone), i.e. the second best alternative.

Opportunity Cost and PPC

Graph 2

Impact on PPF
This is indicated by the negative slope of the
production possibilities curve (or frontier).
Suppose a new technique was discovered that
allowed the wine producers to double their
output for a given level of resources.
Further suppose that this technique could not be
applied to grain production.
The impact on the production possibilities is
shown in the next diagram:

Shifted PPF

What PPC shows

maximum feasible (obtainable) amount of one
commodity for any given amount of another
commodity,.
The concept is used in in microeconomics to
show the options open to an individual firm and
in macroeconomics to show the production
possibilities available to a nation or economy.

What PPC shows

All points on a production possibilities curve are
points of maximum productive efficiency or
minimum productive inefficiency
That is, there must be a sacrifice, an opportunity
cost (given by the slope of the curve in absolute
value), for increasing the production of a good
by one unit.
Conversely, points inside the frontier are feasible
but productively inefficient.