The Production

Possibility Curve
 A curve that shows the
maximum combinations of two
outputs that an economy can
produce, given its available
resources and technology
 three assumptions underline
the Productions Possibilities
Curve
• Fixed resources
• Fully employed resources
• Technology unchanged

1
  Production possibilities frontier
• A graph: combinations of output
that the economy can possibly
produce
• Given the available
- Factors of production and
technology
The PPF • Example:
- Two goods: computers and
wheat
- One resource: labor
(measured in hours)
- Economy has 50,000 labor
hours per month available for
production

2
2
 PPF Example
Wheat
Production (tons)
Point
on Com- 6,000
graph puters Wheat E
5,000
D
A 500 0 4,000

B 400 1,000 3,000 C

C 250 2,500 2,000
B
D 100 4,000 1,000
A
E 0 5,000 0
0 100 200 300 400 500 600
Computers

33
4

The PPF: What We Know So Far

 Points on the PPF (like A – E): possible
• Efficient: all resources are fully utilized
 Points under the PPF (like F): possible
• Not efficient: some resources are underutilized (e.g.,
workers unemployed, factories idle)
 Points above the PPF (like G)
• Not possible
G

4
 Moving along a PPF
• Involves shifting resources
from the production of one
good to the other
Society faces a tradeoff
The PPF • Getting more of one good
requires sacrificing some of
the other
The slope of the PPF
• The opportunity cost of one
good in terms of the other

5 5
 The PPF
 Trade off Wheat
(tons)
 Opportunity cost 6,000
E
5,000
D
4,000

3,000 C
2,000
B
1,000
A
0
0 100 200 300 400 500 600
Computers

6
 The PPF and Opportunity Cost
Wheat  The slope of a
(tons)
–1000 line equals the
6,000 slope = = –10
100 “rise over the
5,000
run.”
4,000
3,000
2,000
1,000
0  Opportunity cost
0 100 200 300 400 500 600
of 1 computer =
Computers
10 tons of
wheat.
77
 Active Learning 2: PPF and
Opportunity Cost
In which country is the opportunity cost of cloth
lower?
FRANCE ENGLAND
Wine Wine
600 600

500 500

400 400

300 300

200 200

100 100

0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth

8
9

The Shape of the PPF

 Shape of the PPF
• Straight line: constant opportunity cost
- Previous example: the opportunity cost of 1
computer is 10 tons of wheat
• Bowed outward: increasing opportunity cost
- As more units of a good are produced, we need to
give up increasing amounts of the other good
produced

9
 A production possibility curve
8

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

4 8 0.0
7 2.2
3 6 4.0
5 5.0
4 5.6
2 3 6.0
2 6.4
1 1 6.7
0 7.0

0
0 1 2 3 4 5 6 7 8 10
Units of clothing (millions)
 Increasing opportunity costs
8

x
6
Units of food (millions)

1 y
5
1
4 2

3
z
1

0
0 1 2 3 4 5 6 7 8 11
Units of clothing (millions)
 Making a fuller use of resources

x
Production inside
Food

the production y
possibility curve

O
Clothing 12
 Why the PPF Might Be Bowed
Outward
 As the economy
Food

shifts resources
from Food to
Clothing:
 PPF becomes
steeper
 and the
opportunity cost
Clothing of clothing
increases.

1313
 Why the PPF Might Be Bowed
Outward
 The PPF is bowed outward when:
• Different workers have different skills
• Different opportunity costs of producing one
good in terms of the other
• There is some other resource, or mix of
resources with varying opportunity costs
- E.g., different types of land suited for different uses

14
  The ability of an economy to
produce greater levels of
Economic output, represented by an
Growth outward shift of its production
possibilities curve

15
  A production possibilities
curve can also show growth.

• When an economy
grows, the curve shifts to
the right.
Growth • However, when an
economy’s production
capacity decreases, the
economy slows, and the
curve shifts to the left.

16
 Economic Growth and the PPF
Wheat
 With additional (tons)
resources or an Economic
6,000
improvement in growth shifts
5,000 the PPF
technology, outward.
4,000
the economy can
3,000
produce more
computers, more 2,000

wheat, or any 1,000

combination in 0
0 100 200 300 400 500 600
between.
Computers

1717
 A shift in the production possibilities frontier

Quantity of
Computers
Produced A technological advance in
4,000 the computer industry
enables the economy to
produce more computers
3,000 for any given number of
2,300 G cars.
2,200
A As a result, the production
possibilities frontier shifts
outward. If the economy
moves from point A to point
G, then the production of
both cars and computers
increases.
0 600 650 1,000 Quantity of
Cars Produced
18
1818
 Growth in potential output

5 years’ time
Food

Now

O
Clothing 19
Q: Production Possibilities
What happens if
there is an increase
in population?
Robots

Pizzas
20 20
 Technology and Education

 Technology can
increase a nation’s
efficiency.
 Many governments
spend money
investing in new
technology,
education, and
training for the
workforce.

21