Explain the concept of the production possibility curve.
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The production possibilities curve (PPC) is simply a device for illustrating a couple of fundamental points about economics. One of these is the concept of efficiency and economic growth. The other, and more important, concept is the concept of opportunity costs. To think about this, refer to the image that I have linked to below. There, we have an imaginary economy that can make computers and food.
The PPC illustrates the idea of efficiency and inefficiency in an economy. It shows us that an economy can make certain combinations of goods when it runs at peak efficiency (given a certain amount of resources). It shows us that anything inside the curve is less than what the economy could make. That emphasizes to us that economies have to have resources and they have to use them well. Finally, it shows us that there are levels of production that are simply impossible unless the economy can find new resources or new technologies. This tells us that such things are necessary for economic growth.
The other thing the PPC tells us is that opportunity costs exist. In order to make more computers, this economy has to give up the chance to make some food. In order to make food, it has to give up the chance to make more computers. If an economy is working efficiently (if it is on the curve of the PPC), it cannot make more of one thing without giving up the chance to make some of the other thing.
These are the most important concepts that the PPC teaches us.
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