What Is a Production Possibility Curve (ppc)

a) What is a Production Possibility Curve (PPC)?

Every country has unlimited wants but the resources are limited. The Production Possibility Curve (PPC) is designed to map out such phenomenon. BusinessDictionary.com defines the this curve as a "graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other. This curve helps in determining what quantity of a non-essential good or a service an economy can afford to produce without jeopardizing the required production of an essential good or service."

Figure 1 The Production Possibility Curve

Source :.

With reference to Figure 1 above, imagine that the country is a two-product economy. Consumer goods, represented by X, are goods that goods that are bought by consumers in the market to satisfy their wants. Capital goods, represented by Y, are goods that are involved in the production of consumption goods.

To show where all resources are used to produce capital goods, we should move straight up the vertical axes to the curve and where all resources are used to produce consumption goods, we move straight on the horizontal axes. Points on both axes are extreme and unrealistic. Due to limited resources, a country can only produce a fixed amount of product X and Y. Points A, B and C represent more realistic combinations and they will be discussed further in the next few paragraphs.

Figure 2 Shifts of the PPC

Source : http://www.sparkcharts.sparknotes.com. Created by Tricia Ng, 2009

Figure 2 shows the possible shifts of the PPC. Graph 1 shows an outward shift of the PPC which implies that there is growth in the country's economy. Graph 2 shows an inward shift of the PPC which indicates a shrinking economy as a result of an improvement or decline in its most efficient allocation of resources and optimal production capability respectively.

i. When a country is operating at a point on the curve

With reference to Figure 1, point A is on the curve which means that the country's economy is productively efficient as there is full utilization of the economic resources. However, since the economy is productively efficient, due to scarcity of resources, it can only produce more of one product by producing less of another since resources have to be shifted from one product to another (which is indicative by movement along the curve). The amount sacrificed is the opportunity cost.

However, an economy can be producing on the PPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity due to the opportunity costs or scarcity of resources.

ii. When a country is operating outside and to the right of the curve

As shown in Figure 1, point B operates outside and to the right of the curve. This shows that the economy