PRODUCTION POSSIBILITIES CURVE:
A curve that illustrates the production possibilities of an economy--the alternative
combinations of two goods that an economy can produce with given resources and
technology. A production possibilities curve (PPC) represents the boundary or frontier of the
economy's production capabilities, hence it is also frequently termed a production
possibilities frontier (PPF). As a frontier, it is the maximum production possible given
existing (fixed) resources and technology. Producing on the curve means resources are fully
employed, while producing inside the curve means resources are unemployed. The law of
increasing opportunity cost is what gives the curve
its distinctive convex shape.
Production Possibilities Curve
Production possibilities is an analysis of the
alternative combinations of two goods that an
economy can produce with existing resources and
technology in a given time period. This analysis is
often represented by a convex curve.
A standard production possibilities curve for a
hypothetical economy is presented here. This
particular production possibilities curve illustrates
the alternative combinations of two goods--crab
puffs and storage sheds--that can be produced by
the economy.
The Set Up
According to the assumptions of production
possibilities analysis, the economy is using all resources with given technology to efficiently
produce two goods--crab puffs and storage sheds. Crab puffs are delicious cocktail
appetizers which have the obvious use of being eaten by hungry people, usually at parties.
Storage sheds are small buildings used to store garden implements, lawn mowers, and
bicycles.
This curve presents the alternative combinations of crab puffs and storage sheds that the
economy can produce. Production is technically efficient, using all existing resources, given
existing technology. The vertical axis measures the production of crab puffs and the
horizontal axis measures the production of storage
sheds.
The production possibilities curve should be compared
with the production possibilities schedule, such as the
one presented to the left. A schedule presents a
limited, discrete number of production alternatives in
the form of a table. The production possibilities curve,
in contrast, presents an infinite number of production
alternatives that reside on the boundary of the
frontier. The production possibilities schedule is
commonly used as a starting point in the derivation of
the production possibilities curve.
Key Economic Concepts
Production Possibilities Schedule
As a introductory model of the economy, the production possibilities curve is commonly
used to illustrate basic economic concepts, including full employment, unemployment,
opportunity cost, economic growth, and investment.

Opportunity Cost: This is indicated by the negative slope of the production
possibilities curve (or frontier). As more storage sheds are produced, fewer crab
puffs are produced. This reduction in the production of crab puffs is the opportunity
cost of storage shed production.

Full Employment: This is indicated by producing on the production possibilities curve.
The curve indicates the maximum production of crab puffs and storage sheds
obtained with existing technology, given that all available resources are engaged in
production.

Unemployment: This is indicated by producing inside the production possibilities
curve. If some available resources are not engaged in production, then the economy
is not achieving maximum production.

Economic Growth: This is indicated by an outward shift of the production possibilities
curve, which is achieved by relaxing the assumptions of fixed resources and
technology or by increasing the quantity or quality of resources. With economic
growth more of both goods, crab puffs and storage sheds, can be produced.

Investment: This is indicated by a tradeoff between the production of consumption
goods (crab puffs) and capital goods (storage sheds). Investment results if society
moves along the production possibilities curve, producing more capital goods and
fewer consumption goods.
Slope
Slope of the
Production Possibilities Curve
The slope of a line is measured by calculating the
change in the value measured on the vertical axis
divided by the change in the value measured on the
horizontal axis. Another way of saying this is to
divide the rise by the run.
For the production possibilities curve to the right,
this is the change in the quantity of crab puffs (rise)
divided by the change in the quantity of storage
sheds (run).
Here is a handy formula for calculating the slope of
the production possibilities curve.
rise
slope =
change in crab puffs
=
run
change in sheds
For example, the slope of the production possibilities curve between points I (8 sheds and
270 dozen crab puffs) and J (9 sheds and 200 dozen crab puffs) is -70. The rise is a
decrease of 70 and the run is an increase of 1.
change in crab puffs
slope, I to J =
-70
=
change in sheds
<= PRODUCTION POSSIBILITIES
= -70
1
PRODUCTION POSSIBILITIES
SCHEDULE =>