Production Possibility Curve (PPC)

Definition

A curve that shows all possible combinations of two types of goods that a country can produce under the following conditions is called its production possibility curve (PPC).

1. The state of technology remains constant.

2. There is full employment of resources, which means that all the factors of production available in the country are used.

3. Efficient methods of production are used.

This curve is also called the production possibility frontier (PPF) since it shows a boundary between what can be produced and what cannot be produced.

The concept of production possibility frontier explains many concepts of microeconomics and macroeconomics.

The factors of production are land, labour, capital, and enterprise. An efficient method of production is the one that gives maximum output with the given quantity of inputs or resources.

The model of PPC can also be used by a business to evaluate the functioning of a production system when two different commodities are produced together.

Assumptions of PPC

PPC is drawn by taking the following assumptions:

1. The country can produce two types of goods only, for example, agricultural goods and manufactured goods.

2. The same resources are used to produce both goods.

3. The quantity and quality of resources remain constant.

4. The state of technology remains constant.

5. The resources are fully employed.

6. Efficient methods of production are used.

The Shapes of PPC

The production possibilities curve can have the following shapes:

1. Straight Line PPC
2. Concave PPC

Straight Line PPC

The straight line PPC is drawn by assuming that the resources are perfectly mobile and can be switched or re-allocated between two products with a constant opportunity cost.

Data Example

Let’s draw the straight line PPC by using the following data.

Graph

Now let’s draw the graph.

The above PPC is a downward-sloping production possibility curve.

Types of Points

There are three types of points on the graph of PPC. Each point shows a combination of agricultural goods and manufactured goods that a country can produce.

Points on PPC

All the points on PPC are efficient and attainable combinations of two goods. For example, point D shows that 30 units of agricultural goods and 40 units of manufactured goods can be produced by using all the resources in the country.

Points below PPC

Any point below PPC is attainable but inefficient combination because it gives a lower output of both goods. For example, point P shows that 20 units of agricultural goods and 40 units of manufactured goods can be produced.

Points above PPC

Points above PPC are unattainable. For example, point Q shows 30 units of agricultural goods and 80 units of manufactured goods, which is not possible to produce due to the availability of limited resources.

Marginal Rate of Transformation (MRT)

The number of units of manufactured goods (Y) that must be sacrificed in order to produce one additional unit of agricultural goods is called MRT. 

It is calculated by using the following formula:.

MRT = ∆Y / ∆X

MRT is the opportunity cost of making one more unit of X and shows the slope of PPC.

For a straight line PPC, MRT is constant due to perfect factor mobility, and it shows a constant opportunity cost when the resources are re-allocated or switched between the two goods produced by the country. In the above PPC graph, MRT is 2, which means 2 units of manufactured goods have to be given up to produce one more unit of agricultural goods.

Downward Slope

The PPC is always sloping downward because there is a need to sacrifice some units of one good in order to produce more units of the other good. 

PPC and Trade-off between Products

The PPC shows a trade-off in the production of the two goods. A trade-off is the process of deciding whether to give up some of one good in order to obtain more of another. So, the trade-off of producing 10 more units of X is the loss of 20 units of Y.

Concave PPC

The concave or bowed outward PPC is drawn by assuming that the resources are imperfectly mobile and can be switched or re-allocated between two products with an increasing opportunity cost.

Data Example

Let’s draw the bowed outward PPF by using the following data.

Graph

Now let’s draw the graph of bowed outward PPF.

The above PPF is a downward-sloping, bowed outward curve.

Concave PPC and Increasing Opportunity Cost

In concave PPC, resources are assumed to be imperfectly mobile. It means that the resources are specialised and are not equally good at producing both products. This means that the opportunity cost increases when resources are re-allocated from manufactured goods to agricultural goods. 

Shift in Production Possibility Curve (PPC)

The whole production possibility frontier (PPF) of an economy can shift both inward and outward. The inward shift of PPF shows a decrease in production potential, and the outward shift shows an increase in the productive potential of the country.

The above graph illustrated the shift of the entire PPF of an economy inwards, which is economic decline, and outwards, which is potential economic growth.

Economic Decline (Inward Shift)

The inward shift or economic decline happens when an abnormality or natural disaster occurs in an economy, causing a reduction in the quantity and quality of the factors of production available. 

For example, in 2011, the Japanese tsunami destroyed its resources. This natural disaster shifted their PPF inward, resulting in economic decline.

Potential Economic Growth (Outward Shift)

The outward shift or potential economic growth happens when the production potential of an economy inflates. This happens due to an increase in the quality or quantity of resources.

PPC and Economic Concepts

The PPC can be used to explain many concepts of economics. Let’s explain a few of them.

Scarcity

The PPC illustrates scarcity as it shows a boundary or a limit beyond which a country cannot produce. This is due to the fact the resources are limited or scarce. That is why points above PPC are unattainable.

Specialisation

Any point on the PPC and on the x-axis or y-axis shows specialisation. For example, a point of PPC on the x-axis illustrated that the country is producing only good X and is specialising in it.

Opportunity Cost

Another use of the PPC is to explain the opportunity cost, which happens due to the scarcity of resources. For example, in order to produce one more unit of agricultural goods, the economy must give up some units of manufactured goods. The movement along the same PPC from one point to another point illustrates opportunity cost. It is also called a trade-off or making a choice in resource allocation/re-allocation. The shape of PPC shows constant or increasing opportunity cost.

Unemployment

The points on PPC show no unemployment or full employment of resources. The points inside PPC show unemployment or underemployment of resources. The closer the point is to the origin within PPC, the higher the unemployment.

Efficiency

The PPC is also used to demonstrate productive efficiency. If the economy is producing at any point on the PPC, then this economy depicts productive efficiency.

Inefficiency

A point that is inside or below the PPC represents inefficient resource allocation. 

Productive Potential

The main use of PPC is to demonstrate the maximum productive potential of a country’s economy. All the points on PPC show the maximum possible output of two goods that a country can produce by using all the available resources. 

Economic Growth

An outward shift of PPC shows potential economic growth (an increase in the productive potential of a country). A movement from a point within PPC closer to origin to a point closer to PPC shows actual economic growth (an increase in the actual output or real GDP of a country).

Attainable Production

The attainable production is any point that is on or inside the PPC.

Unattainable Production

The unattainable production is the point away from or outside the PPC. The economy is unable to reach this output combination due to the lack of available resources.

Conclusion

In conclusion, the production possibility curve is used to demonstrate the maximum possible production potential (output) of two different commodities or services of an economy when there is limited availability of resources (factors of production). Economists and analysts use PPC to understand and evaluate the possible production combinations of a country with given resources and technology. The PPC is also used to explain many concepts of microeconomics and macroeconomics, such as scarcity, choice, opportunity cost, efficiency, unemployment, and economic growth.