A PPC or production possibilities curve maps all possibilities for producing various quantities of 2 different goods whose production depends on shared resourced. Thus, at one end, the curve shows the maximum quantity of good A that can be produced if you produce none of good B, and at the...
A PPC or production possibilities curve maps all possibilities for producing various quantities of 2 different goods whose production depends on shared resourced. Thus, at one end, the curve shows the maximum quantity of good A that can be produced if you produce none of good B, and at the other end, it shows the maximum quantity of good B that can be produced if you produce none of good A.
For example, take a small bakery might make cakes and pastries. If there is only 1 baker working, and she bakes 1 cake per hour or 24 pastries in an hour (but not both), then in an 8-hour shift she can make 8 cakes, 192 pastries, or any number along or below the curve drawn between these two points. Along this curve of maximum production, a cake can be traded for 24 pastries, and vice versa. Below the curve are shown all points that do not maximize total production. A PPC is useful for quantifying the trade-off between producing 2 goods. In combination with data on demand for each good and the profit margin for each, one can determine what combination of producing each good is likely to maximize profits.
Opportunity cost is what one must sacrifice in order to take a specific action. In the previous example, the opportunity cost of baking 1 cake is 24 pastries and vice versa. In reality, of course, opportunity costs are much more complicated because there is nearly always more than 2 possible paths of action. For example, a more realistic bakery probably has a number of different kinds of cakes which all take different lengths to make and have different levels of demand and profit margins. The same for pastries, and perhaps our bakery also creates doughnuts, fudge, sandwiches, drinks, and a number of other goods. In addition, realistically speaking, we also need to consider how our baker allocates their time with regard to non-baking tasks. For example, when and how long they spend on breaks, on cleaning up the store, on customer service, on thinking about new items to add to the store, etc. Baking a cake means not doing any of these tasks while focused on the cake, and thus the opportunity cost is far more complicated than simply a number of pastries.
As this example shows, trying to capture the real opportunity cost of producing a good is nearly impossible. A PPC lets us quantify a specific aspect of the opportunity cost of producing one good: how much of a specific other good could be produced with the same resources. Thus, a PPC should not be understood as mapping the total opportunity cost but rather as giving a handle for understanding one specific and simplified aspect of the opportunity cost.