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The Production Possibilities Curve When you begin working with a new graph, it is useful to start with a basic understanding of what the graph depicts (BEFORE you start getting into the "nitty gritty" of the graph). The production possibilities curve (PPC) is aptly named. It is a curve that illustrates the possible combinations of output that an economy can produce. A PPC measures output on both axes. A two dimensional graph has only two axes and allows for only two goods (or types of goods) to be measured. An economy with only two goods is a VERY simple case, but can show some important economic concepts in the least complicated way. The PPC shows how much the economy can possibly produce. The economy may produce only one good, only the other good, or some of both goods. The PPC graph illustrates all of the possible combinations of goods a country can produce. For example, the PPC below shows the production possibilities for the country Alpha. Alpha can use its resources (labor and capital) to produce either food or education or some of each. Food (measured in millions of tons) is measured on the vertical axis, education (measured in millions of student years0 is measured on the horizontal axis.
If Alpha chooses to use all of its resources to produce food, then it uses no resources to produce education. This choice results in the maximum possible amount of food (let's say 10 million tons) and zero education. This point is represented on the graph as point a. On the other hand, if Alpha chooses to use all of its resources to produce education, then it uses no resources to produce food. This choice results in the maximum possible amount of education (let's say 12 million student years) and zero food. This point is represented on the graph as point b. These two points (the Y and X intercepts) show the maximum possible production of ONLY food or ONLY education (when all resources are used to produce one and no resources are used to produce the other).
However, Alpha does not have to produce ONLY food or ONLY education. Alpha can also choose to produce some of each - by using some of its resources to produce food and the rest to produce education. But keep in mind that when Alpha decides to use its resources to produce more of one (food or education) then those resources are not available to produce the other. Therefore an increase in the production of one results in a decrease in the production of the other. This illustrates the opportunity cost principle discussed in Chapter 1 and throughout the textbook. The cost of producing another million tons of food is the value of the education given up to produce it. The cost of producing another million student years of education is the value of the food given up to produce it. Let's assume that Alpha is producing only food (10 million tons) and then decides it needs to produce some education (3 million student years). If Alpha switches some of its resources to the production of education, then those resources are taken out of food production. Let's say that producing three million more student years of education means giving up 2 million tons of food. Alpha can produce 8 million tons of food and 3 million student hours of education at the same time. The opportunity cost of the 3 million student years of education is the value of the 2 million tons of food (what Alpha gave up to produce the 3 million student years of education). Another possibility for Alpha is to produce even more education (which means giving up even more food production). For example, producing 9 million student years of education might mean reducing food production to 3 million tons. These two possibilities are represented on the graph as points c and d.
Connecting these possibilities shows all possible production points and gives the PPC shown below.
This graph has a negative slope. This shows that increasing the production of one good results in decreased production of the other (opportunity cost!). This is because to produce more of one good requires using more resources and so those resources are not available to produce the other good. A few other things to note on the PPC graph: The PPC shows the combinations of goods that an economy CAN produce. To reach the maximum possible production the economy must use all of its resources efficiently. This means that the economy must use all of its resources and use them to produce the maximum possible output. There can be no wasted resources! This means that any point ON the PPC represents efficient use of resources since it represents the maximum possible output. For Alpha, points a,b,c,d or any other point ON the PPC are efficient. If an economy does not use all of its resources efficiently, it will not produce the maximum possible output. It will produce less than the maximum possible. For example, if Alpha only produced 2 million student years of education and 8 million tons of food, it would be producing inefficiently. The PPC shows that it is possible for Alpha to produce 3 million student years of education and 8 million tons of food, but if Alpha is not producing the maximum possible - it is producing inefficiently. This is shown by point e, or any other point that lies below Alpha's possibilities curve.
Since the PPC represents the maximum possible production when the economy uses all of its resources efficiently, it is not possible to produce beyond the curve. It is not possible for Alpha to produce at points that exceed its possibilities. For example, Alpha could not produce 6million student years of education while producing 8 million tons of food - 3 and 8 are the maximum possible (point c on the graph). Therefore point f and any other point beyond the PPC are not attainable.
Finally, if an economy acquires more resources it will be possible for the economy to produce more. For example, if Alpha acquired more capital (by investing) or more labor (through population growth or improved quality of labor) it could produce more food, more education, or more of both. Also, if Alpha were to find better, more efficient way to use its resources (through technological advances) it could also produce more. In either case, more resources or advanced technology, Alpha's production possibilities would increase. For example, more resources or better technology could make it possible to produce 8 million tons of food and 6 million student years of education. This would move the production possibilities curve outward so that point f would become attainable!
Understanding what the PPC illustrates, remembering what is labeled on the axes, and thinking about how an economy uses resources to produce output can be very helpful interpreting PPC graphs! |
