What is a Production Possibilities Curve (PPC)?

A Production Possibility Curve is an economic curve that shows the maximum output or different combinations of output that can be produced using existing resources. Factors such as movement of the curve or points on/in/outside the curve illustrate many economic concepts such as scarcity, opportunity cost, limited resources etc.  

It can show the output of a country, a firm, or the spending on a good/service. On both the axises of a PPC, there would be 2 different goods/services or 2 different types of goods/services ( for example good A and good B ) and there would be a curve connecting the 2 points on the x and y axis’. Rarely, when it is a straight line instead of a curve, it is an indicator that the opportunity cost is constant.  

Movements or points on a curve can tell us many things about the output of a country or firm. When the curve moves outwards, it indicates that the productive capacity of the economy or firm has increased – this is caused by an increase in the quality or quantity of factors of production (land, labour, capital, or enterprise). This means they can now produce more goods in the same time compared to earlier. Similarly, when it moves inwards, it is due to a decrease in quantity or quality of factors of production. 

Source: https://www.economicsonline.co.uk/definitions/production-possibility-curve-ppc.html/

Points drawn on the curve can be indicators of how well the existing resources are being utilized. If a point is drawn on a PPC (e.g. points 3 and 4 on the image), it indicates that resource utilization is optimum. If the point is inside the PPC (point 1), resources are not being utilized fully, and the economy/firm needs to make better use of resources. If outside (point 2), overutilization is occurring, which is risky as it is unsustainable, and resources can be quickly depleted. Hence, there will not be sufficient resources for use in the future. 

Source: https://www.reviewecon.com/production-possibilities-curve

Since resources are limited, increasing the output of good A would need a firm/country to reduce the output of good B, as they are produced from the same limited resources. When more of good A is produced, the output of good B that would have been produced if the output of good A had not been produced becomes the opportunity cost. This concept can also be shown on a PPC. Drawing lines connecting from any 2 points on each axis and rectangles between the points highlights how much of one good is sacrificed to gain more of the other, demonstrating increasing opportunity cost when the boxes get taller or steeper.  

Editor: Tamari (Tako) Mtiulishvili