- A production possibilities curve (PPC) is a model that shows alternative ways that an economy can use its scarce resources
- This model graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency.
- Also called the Production Possibilities Frontier (PPF)
4 Key Assumptions
- Only two goods can be produced
- Full employment of resources
- Fixed resources (Ceteris Paribus)
- Weβre assuming that all the resources are fixed
- Fixed technology
- Weβre assuming that all our technology is stagnant
- Opportunity Cost: Quantifying the trade-off of sacrificing the second-best option when picking the best option
- Constant Opportunity Cost: Resources are easily adaptable for producing either good. For ex: sacrificing one pizza gives you one pasta, or vice versa. The result is a straight-line PPC (not common)
- Law of Increasing Opportunity Cost: As you produce more of any good, the opportunity cost (forgone production of another good) will increase
- This is because resources are NOT easily adaptable to producing both goods. For example, some people might be really good at cooking and some really good at coding. Playing at maximum efficiency, moving people from making pizza to making robots will have minimal opportunity cost because we keep the cooks in the kitchen and move the programmers to the office. However, if we keep trying to maximize robots, we will end up with increasing opportunity costs as we move cooks to the office (low efficiency).
Efficiency
The PPC illustrates efficiency.
- An economy is efficient if there is no way to make anyone better off without making at least one person worse off
- An economy can be efficient in production
- An economy can be efficient in the allocation
Productive Efficiency:
- Products are being produced in the least costly way
- This is represented by any point on the PPC
Allocative Efficiency:
- The products being produced are the ones most desired by society β the consumers are as well off as possible
- The optimal point* on the PPC depends on the desire of society. It is a combination of productive efficiency and allocative efficiency.
Production Possibilities
- Economic growth is a sustained rise in output
- It is shown as an outward shift in of the PPC
3 Shifters of the PPC
- Change in resource quantity or quality
- Change in technology
- Change in trade
Production Possibilities Table
