Production Possibilities
Curve
A graph that illustrates the possible
output combinations for an economy
 It illustrates the tradeoffs that society
faces in using its scarce resources

◦ A choice is necessary because producing more
of one item means making do with less of the
other
Production Possibilities Curve

The production possibilities model is based
on three assumptions:
◦ an economy makes only two products
◦ resources and technology are fixed
◦ all resources are employed to their fullest capacity
The Production Possibilities Model
Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.
The Production Possibilities
Curve (a)

The production possibilities curve shows a
range of possible output combinations for an
economy.
◦ It highlights the scarcity of resources.
◦ It has a concave shape, which reflects the law of
increasing opportunity costs.
Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.
The Production Possibilities
Curve (b)
Figure 1.1, page 8
Production Possibilities
Schedule
Production Possibilities Curve
a
1000
b
f
Hamburgers Computers
point
on graph
1000
0
a
900
1
b
600
2
c
0
3
d
Hamburgers
900
unattainable
c
600
e
inefficient
d
0
1
2
3
Computers
Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.
The Law of Increasing
Opportunity Cost
Figure 1.2, page 10
Hamburgers
Opportunity Computers point
Cost of
on graph
Computers
1000
0
a
100
900
1
b
2
c
Production Possibilities Curve
a
1000
As the quantity
of computers
rises, so does their
opportunity cost.
b
900
Hamburgers
Production Possibilities Schedule
c
600
300
600
600
0
d
3
d
0
1
2
3
Computers
Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.
Production Efficiency
Achieved when it is not possible
to produce more of one good
without producing less of the
other good
 Occurs only at points on the
production possibility curve

Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.

The concept that as more of one item is
produced by an economy, the opportunity
cost of additional units of that product
rises
Law of Increasing Opportunity
Cost
Further Understanding of the
Opportunity Cost Calculation
Opportunity Cost =
Give up
Gain
Opportunity cost of one computer
= 4-7 televisions = - 3 = -1.5 tv/cmpt
6-4 computers
2
Further Understanding of the
Opportunity Cost Calculation
Production Possibilities Curve
With more
computers, the
curve shifts out
in the next
period.
Hamburgers
1000
0
3
Shifts in Production Possibilities
Computers
Figure 1.2, page 10
Copyright © 2005 by McGrawHill Ryerson Limited. All rights
reserved.
To expand production possibilities
curve – You need economic growth –
but how?

Basic items that are used in all types of
production to meet the needs of wants of
individuals and society as a whole
◦
◦
◦
◦
Natural Resource
Capital Resource
Human Resources
Entrepreneurship
Economic Resources
Specific strategies to increase
economic resources
Increase resources by discovery of new
oil and gas deposits (Natural resources)
 Increase human resources through
immigration and improving the skills of
the existing workforce
 Increase an economy’s capital stock –
devote more resources into producing
more efficient machines and technology.
