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Define the production possibilities curve.

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yemawe52 | Honors

Posted May 7, 2013 at 7:43 AM via web

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Define the production possibilities curve.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 7, 2013 at 2:02 PM (Answer #1)

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A production possibilities curve (PPC) is a curve that shows the maximum amounts of two different goods or services that an economy can produce at a given time.  It is useful for a couple of reasons.  First, it can illustrate the idea of opportunity cost.  Second, it can help us to understand the ideas of efficiency and inefficiency in an economy as a whole. 

As you can see in the file that I have attached below, a PPC shows us how much of two goods our economy can produce.  This assumes that our economy has fixed resources.  In the file, we can see that our economy produces two goods, Good A (sorry, the Good A label got cut off) and Good B.  We can see that whenever we produce more of Good B, we have to give up some of Good A.  This is shown by a movement from Point A to Point B on the curve.  That shows us that there is an opportunity cost that comes with producing more of either good. 

The PPC also shows us about efficiency and inefficiency.  Any point on the curve is efficient; it represents a point where our economy cannot make any more total goods.  Points A and B are efficient.  It also shows us inefficiency.  Point C is inefficient as we are not making as many things as we could.  Perhaps not all of our people have jobs at this point.  Point D is impossible with our current level of resources and technology.  To get to Point D, we need economic growth through finding more resources or inventing new technology.

Thus, a PPC can show us many things about opportunity cost, efficiency, and economic growth.

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