What is the Production Possibility Curve
Production possibility curve is a curve that measures the maximum combination of outputs that can be obtained from a given number of inputs when it reaches its maximum level of efficiency. The production possibility curve determines whether a given resource is fully utilized while maintaining the same technology used, or what goods can be produced with it.
The slope of the production possibility curve shows you the trade-off between the cost of a good in terms of another. Therefore, the production possibility curve is a tool that greatly helps to decide which combination of goods (or services) to produce to achieve maximum resource efficiency.
To put it simply, with the same amount of resources, the production possibility curve (PPC) shows you the cost when you produce something between the two products.
The Production Possibility Curve (PPC)
The production possibility curve assumes that a producer or country can use all of its production resources to produce 2 goods and that the number of factors of production and technologies available to the economy is fixed.
Each point on the production possibilities curve represents the trade-off between the cost of producing one good in terms of another (producing more of one good and less of the other). The production possibility curve shifts along the axis whose input is changing. Increases in inputs or increases in the productivity of inputs shift the production possibility curve out and vice versa.
As you can see from the production possibility graph above, when the production of the product X increase from 75 to 100 then the output of the production Y is reduced from 60 to 40. In contrast, when the production of product Y increase from 40 to 60 then the output for the production X will be reduced from 100 to 75.
The production possibility curve (PPC) does not tell us an exact number of goods to produce to reach efficiency, it only shows how much of each good will be a cost of producing another good. To decide where the sweet spot you need to produce a good that generates the most profit.
To summarize, the production possibility curve demonstrates that:
- There is a limit to what you can achieve, given the existing resources and technology.
- Every choice you make has an opportunity cost. When you chose something it costs something else.
Additionally, when the production possibility curve shows the points inside the curve means they are points of inefficiency (less quantity of output as it should be).