1.4. Production possibility curve (PPC) diagrams
- Syllabus
- 0455–2027–2028
- Topic
- 1.4
- Level
- —
Learning objectives
1.4.1Production possibility curves (PPC)• definition• drawing and interpretation of the PPC diagram1.4.2Points under, on and beyond a PPC• the significance of the location of different production points1.4.3Movements along a PPC• the significance of movements along a PPC and opportunity cost1.4.4Shifts of a PPC• causes and consequences of shifts of a PPC in terms of an economy’s growth
Build and read a production possibility curve
A production possibility curve (PPC) shows the maximum combinations of two types of output that an economy can produce in a given period when it uses its current resources and technology.
To draw one: 1. Put the output of one good on the horizontal axis and the other on the vertical axis. 2. Label both axes with quantities, not prices. 3. Plot attainable maximum combinations. 4. Join the frontier as a downward-sloping line or curve reaching both axes.
Moving along the frontier raises the output of one good only by reducing the other because resources are finite. The intercept on each axis is the largest output possible when all suitable resources are devoted to that good; other points on the PPC show maximum mixed combinations.
A PPC is a simplified capacity boundary, not a record of what consumers demand or what firms earn. Its position is interpreted for the stated resources, technology and time period; if productive capacity changes, the curve itself can shift.
Interpret points inside, on and beyond a PPC
A production point's location shows whether the output combination is efficient, inefficient or currently unattainable with the economy's existing productive capacity.
| Location | Meaning | What would be needed to change it? |
|---|---|---|
| inside / under the PPC | attainable but inefficient: some resources are unemployed, underused or misallocated | use existing resources more fully to move toward the curve |
| on the PPC | attainable and productively efficient: maximum output is obtained from current resources and technology | reallocate resources to change the mix while remaining efficient |
| beyond / outside the PPC | not currently attainable | increase the quantity or quality of resources or improve technology so capacity expands |
If a recession creates unemployment, actual production may move from the PPC to a point inside it. The economy has spare capacity, but the PPC need not shift because the quantity and quality of productive resources may be unchanged.
A point on the PPC means productive efficiency, not necessarily the best allocation for society. The economy may still prefer a different combination on the same frontier, depending on its priorities.
Measure opportunity cost along a PPC
A movement along a PPC is a reallocation of existing resources between the two outputs. More of one output is gained, but some of the other output is forgone; that sacrifice is the opportunity cost.
Read the coordinates before and after the move. Calculate the increase in the chosen output and the decrease in the other. The total opportunity cost of the increase is the amount of the other output lost.
| Point | Good X | Good Y |
|---|---|---|
| A | 80 | 20 |
| B | 60 | 35 |
Moving from A to B gains 15 units of Y and gives up 20 units of X. The opportunity cost of the additional 15 Y is therefore 20 X; the opportunity cost per extra unit of Y is 20/15=1.33 units of X.
Do not call a movement along the existing curve economic growth: productive capacity has not increased. The economy has changed its output mix. Growth is represented by an outward shift of the PPC.
Explain inward and outward shifts of a PPC
A PPC shifts when an economy's productive capacity changes. An outward shift means it can produce more than before and represents economic growth; an inward shift means its maximum possible output has fallen.
| Shift | Causes | Consequence |
|---|---|---|
| outward | more or better resources; investment in capital; improved education or labour productivity; technological progress | previously unattainable combinations may become attainable |
| inward | destruction or depletion of resources; loss of workers; damage to capital; lower resource quality | some previously attainable combinations become unattainable |
A change that raises capacity for both outputs shifts the whole frontier outward. If technology improves only the production of one good, the frontier can rotate outward toward that good's axis while the other intercept remains unchanged.
Lower unemployment or recovery from recession normally moves production from inside the PPC toward the existing curve: it uses spare resources but does not by itself expand capacity. A lasting change in the amount, quality or productivity of resources shifts the frontier.
An outward shift shows potential growth, not a guarantee that every output will actually rise. The point chosen on the new curve still depends on how resources are allocated between the two goods.