What is the Production Possibilities Curve (PPC)?

In a typical scenario, we cannot produce an infinite amount of two goods. Instead, we must decide the set amount we should produce of both goods without taking away too much from the other. However, our needs for one good more than the other can further alter this concept. In economics, the production possibilities curve (or frontier; PPC/PPF) illustrates this idea. Let's take a look.

The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. Given an economy's resources and technology, it shows the maximum we can produce of each good while taking the resources and technology of the other good into account.

Imagine an economy that can produce only two goods, say, computers and cars. The Production Possibilities Curve shows the different combinations of these two goods that the economy can produce if it uses all its resources efficiently. Points along the curve represent the maximum output of one good that can be produced while producing a certain amount of the other good.

However, if a point is INSIDE the curve, then the economy is not using its maximum potential resources. This means that this combination of the goods is NOT productive.

If a point is OUTSIDE the curve, then that is not a possible combination. It is impossible and is outside of the range of possible combinations on or inside the PPC.

What does the PPC teach us?

Opportunity Cost: The PPC highlights the concept of opportunity cost, which is the value of the next best alternative that is foregone when a choice is made. Moving along the curve, producing more of one good leads to the sacrifice of some quantity of the other good.

Economic Growth: If an economy experiences growth, perhaps through technological advancements or an increase in resources, the PPC shifts outward, indicating that the economy can now produce more of both goods.

Law of Increasing Opportunity Costs: The PPC typically bows outward, reflecting the law of increasing opportunity costs. This law states that as production of one good increases, the opportunity cost of producing an additional unit of that good rises, because resources are not perfectly adaptable to producing both goods.

Governments and business use the PPC to decide how they need to allocate their resources in the given economy. Thus, it isn't just some simple drawing, but rather an important phenomenon that all people in society need to understand. Even so, this concept could apply to YOU and your financial situation. You may be deciding which two goods to buy, and the PPC can help you decide on allocatively efficient combinations of goods to purchase.

Furthermore, in times of war, the PPC is extremely crucial for the government's needs. They can use it to balance or shift their needs from more domestic goods to more foreign goods, and from more automobiles to more guns, etc. This concept can help us in times of war and make sure we pick the most allocatively efficient combination of goods.

In conclusion, the Production Possibilities Curve (PPC) is a powerful tool in economics that illustrates the trade-offs, opportunity costs, and efficient use of resources in an economy. It is crucial that we as consumers also understand this in order to plan out our resource allocation efficiently in our own lives. Hopefully you learned something new today. Stay learning!