Production Possibility Curve

Production Possibility Curve and Opportunity Cost

A. Production Possibility Curve (PPC)

The Production Possibility Curve (PPC) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the optimum way. If the economy is not producing the quantities indicated by the PPC, resources are being underutilised and the production of society will be less than the potential output. The production possibility Curve shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services should be produced.

Let’s Look at the Graph below. Imagine an economy that can produce only Bread and Butter. According to the PPC, points A, B and C all appearing on the curve represent the most efficient use of resources by the economy. Point X represents underutilisation of resources, while point Y represents the production that the economy cannot attain with its present levels of resources.
Production Possibility Curve
As we can see, in order for this economy to produce more bread, it must give up some of the resources it uses to produce (point A). If the economy starts producing more Butter (represented by points B and C), it would have to change the utilisation of resources from making Bread to Butter which will reduce the production of bread. As the chart shows, by moving production from point A to B, the economy must decrease Bread production by a small amount in comparison to the increase in Butter output. However, if the economy moves from point B to C, Bread output will be significantly reduced while the increase in Butter will be quite small. Keep in mind that A, B, and C all represents the most efficient allocation of resources for the economy.

Point X means that the country’s resources are not being used efficiently or, more specifically, that the country is not producing enough Butter or Bread given the potential of its resources. Point Y, as we mentioned above, represents an output level that is currently unreachable by this economy. However, if there was a change in technology while the level of land, labour and capital remained the same output would increase, and the PPC would shift outwards. A new curve, on which Y would appear, would represent the new efficient allocation of resources.

B. Opportunity Cost

Opportunity cost is the value of what is sacrificed in order to have something else. You may, for instance, leave Coke in order to have orange juice. For you, the orange juice has a greater value than coke. But you can always change your mind in the future because there may be some instances when the orange juice is not as needed as the coke. The opportunity cost of an individual’s decisions, therefore, is determined by his or her needs, wants, time and resources (income).

1 2 3