The Production Possibilities Curve

Chapter 2 Production Possibilities Curve (PPC)

Production – A curve representing all possible
Possibility production combinations of two goods that
Curve can be produced.

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The Production Possibilities Curve

The Production Possibilities Curve
Combination Clothing (X) Food (Y) Opportunity
Assumptions of the PPC: Cost
A 0 8
– The nation’s resources are fully and efficiently
B 1 6
employed producing just these two goods or
C 2 4
services.
D 3 2
– The production is measured over a specified
E 4 0
period of time.
– The quantity and quality of resources used are
fixed over this period of time.
– The technology is fixed over this period of time.

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The Production Possibilities Curve

Combination Clothing (X) Food (Y)
A 0
B 1
C 2
D 3
E 4
Constant Opportunity Cost PPC
Opportunity
Cost
8 Constant Opportunity Cost
6 2 – Food can be traded off for clothing at a
4 2
fixed rate.
2 2
0 2 – Assumes resources are equally efficient in
all lines of production.
– PPC is straight line with constant slope or
opportunity cost

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 Applications of the Production Applications of the Production
Possibilities Curve Possibilities Curve
PPC and Trade-offs
• The PPC slopes downward to the right due to Productive efficiency
scarcity – Occurs when an economy is producing the
maximum output with given technology and
• Individuals or society is forced to make resources. All points on the PPC are productively
choices that involve trade-offs. efficient.
Allocative efficiency
PPC and Unemployment
– Is concerned with the mix of goods and services
• Unemployment is represented by points most valued by consumers.
being inside the PPC curve.

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The Production Possibilities Curve The Production Possibilities Curve

A B
3.0 Point R is unobtainable.
(millions of units per year) C
Combination Newsprint Automobiles Opportunity D R
(X) (Y) Cost 2.5
A 0 3.0 E
Automobiles

B 1 2.9 2.0
C 2 2.7 F
D 3 2.4
1.5
E 4 2.0
1.0 S
F 5 1.4
G 6 0
Point S is inefficient.
0.5
G
0 1 2 3 4 5 6
Newsprint (millions of tonnes per year)
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Applications of the Production Applications of the Production

Possibilities Curve Possibilities Curve
Point R is unobtainable A B
3.0 3.0 Opportunity cost is
thereby representing scarcity.
(millions of units per year)
(millions of units per year)

a b C not constant because

2.5 R 2.5 of increasing relative
D
c cost
Automobiles
Automobiles

2.0 These points are 2.0 d E

all productively
1.5 efficient. 1.5 e F Opportunity cost in
forgone
automobiles
1.0 S 1.0
Point S is inefficient because
0.5 resources are unemployed. 0.5
To obtain:
1 million
f additional tonnes of
G newsprint
0 2 4 6 8 10 12
Newsprint (millions of tonnes per year)
0 1 2 3 4 5 6
Newsprint (millions of tonnes per year)
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 The Production Possibilities Curve Applications of the Production
Possibilities Curve
Combination Newsprint Automobiles Opportunity
(X) (Y) Cost
Law of Increasing Relative or Opportunity
A 0 3.0
B 1 2.9 .1 Costs
C 2 2.7 .2 – As society attempts to produce more of a
D 3 2.4 .3 good, the opportunity cost of additional
E 4 2.0 .4
units generally increases.
F 5 1.4 .6
G 6 0 1.4 – PPC is concave to the origin with
increasing opportunity cost

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Economic Growth
Economic Growth
• Economic growth refers to increasing the economy’s
productive capacity or attaining a higher standard of
Economic Growth
Automobiles per Year
living.
allows for more of
– Economic growth can be shown by increasing everything
the PPC or shifting the PPC outward.
• Sources of economic growth include
– Technological improvement
– Increase in resources
– Increase in productivity

Newsprint per Year

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Specialization and Specialization and

Greater Productivity Greater Productivity
Specialization
– Involves working at a relatively well-defined, Comparative Advantage
limited endeavour; individuals regions, and – The ability to produce a good or service at
nations produce a narrow range of products. the lower opportunity cost.
Absolute Advantage – A relative concept.
– The ability to perform a task using the fewest – Specialize in the production for which we
number of labour hours.
have a comparative advantage.
– Producing with least resources

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 Example of comparative and
absolute advantage Economic Systems
– Lawyer gets paid $400/hour, plants 40 trees per hour.
– Gardener gets paid $20 per hour, plants 20 trees per hour.
– Lawyer has absolute advantage (produce the least
The Three Basic Economic Questions
resources or most efficiently) in planting trees compared to Resource allocation addresses three
gardener (40 trees compared to 20 trees)
– Gardener has comparative advantage (produce with lower
economic questions:
opportunity cost) in planting trees compared to lawyer. 1) What and how much will be produced?
• Opportunity cost to plant 40 trees for lawyer equals 2) How will it be produced?
$400
3) For whom will it be produced?
• Opportunity cost to plant 40 trees for gardener equals
2x$20 = $40

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Economic Systems Economic Systems

Pure Command Economy Pure Capitalist Economy
– Public ownership of all property – Private ownership of all property
resources. resources.
– Centralized government planning answers – Households and firms interact through a
the basic economic questions. system of markets (demand and supply)
– Production planning is done through 5- to answer the basic economic questions.
year plans by centralized government.

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Economic Systems Features of Capitalism

– Private Ownership of Resources
Mixed Economies • Individual households and individual firms own
the productive resources.
– Most economies fall between these two
– Self-interest
extreme cases.
• The primary motive underlying decisions made
– Decisions about how resources are used by households and firms is the pursuit of self-
are made partly by the private sector and interest.
partly by the public (government) sector. • Firms attempt to maximize their own profit.
• Households attempt to maximize individual
wealth, satisfaction, and other personal goals

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 Features of Capitalism Features of Capitalism
– Consumer Sovereignty – Competition
• The system is designed to serve the household • Many independent sellers and buyers
in its consumer role, providing the services they competing the market ensures that the self-
desire at the lowest possible prices. interests of firms and resources work to the
– Markets and Prices best interests of the consumer.
• Two broad types of markets that exist in pure – Limited Government
capitalism • Allocating resources to meet changes in
• product markets consumer demand does not require the “heavy
• factor (resource) markets. hand” of government.
• Called “laissez-faire” in French.

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Features of Capitalism
What and How Much Will Be Produced?
– Firms will produce the mix of goods most wanted by
society because of the consumers’ willingness to
pay.
How Will It Be Produced?
– Firms choose the lowest cost combination of
resources because of the profit motive..
For Whom Will It Be Produced?
– Households with higher levels of income and wealth
will get to purchase and consume a greater portion
of the goods produced in the economy.
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