Production possibility curves

Economics AS · Basic economic ideas and resource allocation. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

A production possibility curve (PPC) shows the maximum combinations of two goods an economy can produce when all its resources are fully and efficiently used, with resources and technology fixed. Points on the curve are efficient. Points inside it mean some resources are unemployed or badly used. Points outside it cannot be reached at present.

Moving along the curve, more of one good means less of the other. This shows opportunity cost. A straight-line PPC means constant opportunity cost. A curve bowed outwards (concave to the origin) means increasing opportunity cost, because resources are not equally suited to both goods.

The whole curve shifts outwards when the quantity or quality of resources rises or technology improves. This is economic growth.

Rules to remember

Opportunity cost of one extra unit of X = units of Y given up ÷ units of X gained.
On the curve: full and efficient use of resources. Inside: unemployment or inefficiency. Outside: unattainable now.
Straight line: constant opportunity cost. Bowed outwards: increasing opportunity cost.
Outward shift: more or better resources (labour, capital, natural resources) or better technology.
Inward shift: loss of resources, for example emigration of workers, war or natural disaster.
Better technology for only one good: the curve pivots outwards along that good's axis; the other intercept stays the same.
Making more capital goods now means fewer consumer goods now, but a faster outward shift in future.

Common mistake

Students say a fall in unemployment shifts the PPC outwards. It only moves the economy from a point inside the curve towards the curve; the curve itself does not move.

Worked example

Points on a PPC are (good A, good B): (0, 90), (5, 80), (10, 60), (15, 30). What is the opportunity cost of each extra unit of A when output of A rises from 10 to 15? Is opportunity cost constant or increasing?

From 10 to 15 units of A, output of B falls from 60 to 30, so 30 units of B are given up for 5 units of A.
Opportunity cost per unit of A = 30 ÷ 5 = 6 units of B.
Earlier steps: from 0 to 5 it is 10 ÷ 5 = 2 units of B; from 5 to 10 it is 20 ÷ 5 = 4 units of B.
The cost rises from 2 to 4 to 6, so the PPC is bowed outwards.

Answer: 6 units of B for each extra unit of A; opportunity cost is increasing.

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