Production Possibilities Curve
AP Economics
A production possibilities curve is a graphical representation of different production choices that
use all of the available resources. It identifies the various possible combinations of the two types of
goods that can be produced when all available resources are employed fully and efficiently.
Simplifying assumptions:
• Available supply of resources is fixed in quantity and quality at this point in time.
Technology is constant during analysis.
• Economy produces only two types of products.
• Production occurs during a given time period—usually one year.
• Technology does not change.
Efficiency. The red curve is the production
possibilities curve. All points along the PPC are
efficient in production. One good can not be
increased without a corresponding decrease in
another good.
Points inside the PPC represent underutilization
of resources. At point I, only 20 million of each
type of good is made, from a possible 50 million if
production was maximized for one good. As such,
point I is inefficient.
Points outside the PPC are unattainable. There are
not enough resources or technology to produce at
point U.
Opportunity costs are represented within the PPC. Assume capital goods are represented by cars
and the consumer goods are represented by potatoes.
At point D, the economy can make 30 million cars and 34 million potatoes. Assume that the
economy decides to make 40 million cars, which lowers potato production to 20 million. In order to
make 40 million cars, the economy must give up 14 million potatoes. That 14 million potatoes is the
opportunity cost of making 10 million more cars.
At point D, the economy can make 30 million cars and 34 million potatoes. Assume that the
economy decides to make 43 million potatoes, which lowers car production to 20 million cars. In
order to make 43 million potatoes, the economy must give up 10 million cars. That 10 million cars
is the opportunity cost of making 13 million more potatoes.
Ultimately, it does not matter the initial point on the PPC. The opportunity cost of one more item
is always the same. The slope of the opportunity cost is constant. This reflects that the two items in
the PPC are perfect substitutes.
Production Possibilities Curve
AP Economics
Math of the Opportunity Cost in PPC
• The opportunity cost of the good graphed on x-axis is always the slope of the PPC.
• The opportunity cost of the good graphed on y-axis is always the inverse of slope of PPC.
Law of increasing opportunity costs. When producers switch from one item of production to
another, the more and more it costs to produce that second item. Economic resources are not
completely adaptable to alternative uses.
1. The amount of other products that must be foregone to obtain more of any given product is
called the opportunity cost.
2. The more of a product produced the greater its opportunity cost (marginal cost).
3. The slope of the PPC becomes steeper (left to right) demonstrating increasing opportunity
cost. This makes the curve appear bowed out, concave from the origin.
The law of increasing opportunity costs indicates movement along the PPC.
Production Possibilities Curve
AP Economics
Economic Growth. Economic growth means an expansion of the economy’s production possibilities: the
economy can produce more of everything. When talking about the PPC, economic growth refers to
shifts of the PPC.
Panel (a). Rightward shifts of the PPC
• Increase in size of labor
• Increase in skills of labor
• Increase in the amount of capital
• Parallel shift implies the change that occurred affected production of both goods equally.
Panel (b). Leftward shifts of the PPC
• Decrease in size of labor
• Decline in skills of labor (efficiency)
Production Possibilities Curve
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•
AP Economics
Decrease in the amount of capital
Parallel shift implies the change that occurred affected production of both goods equally.
Panel (c). Increase in resources of technology benefiting consumer goods
• When such a change occurs, the PPC expands from A to A’.
Panel (d). Increase in resources of technology that benefits capital goods
• When such a change occurs, the PPC expands from F to F’.
Change in Resource
Availability
(Quantity or Quality)
Increase
Right
Decrease
Left
Increases in Capital Stock
Increase
Decrease
Right
Left
Technological Change
Employs available resources
more efficiently
PPC Summary
• Efficiency. PPC represents combinations of output that are possible given the economy’s
resources and technology. Movements along PPC.
• Scarcity. Given resources and technology, the economy can produce only so much.
• Economic Growth. Rightward shifts of the PPC