Production Possibility Curves

• Production possibility curves show how resources should be allocated
• In an economy, what is produced us determined by the quantity and quality of available resources – factor endowment
• These factors of production therefore determine an economy’s production possibilities
• A production possibility curve shows the maximum level of output of the two goods that can be produced

• Production possibility curves can also be used to show opportunity cost.
  • For example, when an economy reallocates its factors or production from point A to B, 350 cars are being given up to get 650 more televisions
• If the economy is producing at point A, the opportunity cost of producing 650 more televisions is 350 cars.

• The shape of the curve is also important
  • When the economy is devoting most of its resources to produce TVs, the curve is relatively steep.
    • This means that in order to produce more televisions, an increasing amount of productive capacity for making cars needs to be sacrificed.

• PPCs can also be used to show what is known as ‘trade-off’
  • If it is decided that more televisions should be produced, the trade-off is that less cars can be produced.
• The extent of any trade-off can be shown from the production possibility curve.

Other Applications

• Production possibility curves can also be used to show the difficult choices that have to be made by developing economies
  • Such economies have low standards of living, expanding populations and little or no economic potential
  • As a result, scarce resources have to be allocated to meet present needs at the expense of investing into the economy to improve it in the later years
    • This is done by investing in capital goods

• To conclude, production possibility curves are highly simplified models to show fundamental concepts like scarcity, choice and opportunity cost