1.3 - The Production Possibilities Curve

Definition and assumptions of the PPC

The production possibilities curve (PPC), sometimes called the production possibilities frontier (PPF), is a graph that illustrates the maximum possible output of two goods or services that an economy can achieve using its available resources and technology.

Key assumptions behind the PPC model

• Fixed resources and technology - The model assumes that the economy has a set amount of resources, such as labour and capital, and that technology does not change.
• Snapshot in time - It represents the economy's production possibilities at a specific moment.
• Two goods only - For simplicity, the model focuses on the production of just two goods or services.

The PPC plots combinations of these two goods, showing the highest level of one good that can be produced for any given level of the other, while using all resources efficiently. The diagram below measures good X along the horizontal axis and good Y up the vertical axis. At point A the economy puts every resource into good Y and produces none of good X, at point B it does the reverse, and every point on the PPC between A and B is a combination that uses all of the economy's resources.

Choice, opportunity cost and scarcity

The PPC highlights fundamental economic principles by showing the limits of what an economy can produce, forcing decisions about resource allocation.

Choice and opportunity cost

Economies must choose how to allocate resources between the two goods, as increasing production of one means reducing output of the other. This trade-off represents opportunity cost: the amount of the second good that must be given up to produce more of the first. The diagram below shows a choice of this kind. Moving along the PPC from point C to point D raises output of good X from 300 units to 400 units, and the 40 units of good Y given up (200 units falling to 160) are the opportunity cost of those extra 100 units of good X.

Scarcity

Scarcity of resources causes the PPC to slope downwards (negatively), as producing more of one good requires sacrificing some of the other. Without scarcity, the curve would not exist, and any combination of goods could be produced without limits.

Increasing opportunity costs and PPC shape

Opportunity costs do not stay constant; they rise as more of one good is produced, which affects the PPC's appearance.

Why opportunity costs increase

Resources are often specialised for particular uses, so reallocating them to produce more of one good becomes less efficient over time. As production concentrates on one good, the economy must use resources less suitable for its production.

The concave shape of the PPC

Due to these increasing opportunity costs, the PPC bows outwards from the origin (it is concave to the origin), getting steeper as production focuses on one good. The diagram below shows why. Moving from point C to point D buys 100 more units of good X (300 rising to 400) for 40 units of good Y (200 falling to 160), but moving on from point D to point E buys the next 100 units of good X (400 rising to 500) for 60 units of good Y (160 falling to 100). Each extra 100 units of good X costs more good Y than the last, which is what makes the curve steepen. The straight line joining A and B is the frontier the economy would have if opportunity cost never changed, and the PPC lies outside it.

Actual economic growth shown on the PPC

Actual growth occurs when an economy improves its use of existing resources, moving closer to its full potential without expanding the PPC itself.

Points inside the PPC and inefficiency

Positions inside the curve indicate underutilisation of resources, such as unemployment or inefficient resource allocation, resulting in lower output of both goods.

Moving towards the PPC for growth

Shifting from an interior point towards the curve represents actual growth through increased efficiency and higher total output. In the diagram below the economy starts at point A, inside the PPC, producing X1 of good X and Y1 of good Y while some of its resources sit idle. As unemployment falls and the resources it already has are used better, it moves to point B, where output of both goods is higher: X2 is greater than X1 and Y2 is greater than Y1. The PPC itself has not moved, so the economy's capacity is unchanged.

Potential economic growth and shifts in the PPC

Potential growth expands the economy's overall capacity, making previously impossible production levels achievable.

Causes of an outward shift in the PPC

• More resources - An increase in the quantity of factors like labour or capital expands production possibilities.
• Better resource quality - Improvements such as enhanced worker skills through training boost productivity.
• Technological progress - Advances in methods or tools allow more output from the same resources, shifting the entire PPC outwards.

An outward shift means the economy can now reach new combinations of goods that were unattainable before, reflecting long-term growth. In the diagram below the PPC shifts outwards from FF' to HH': the maximum output of good Y rises from F to H, the maximum output of good X rises from F' to H', and the combinations between the two curves have become attainable.