Production Possibility Curve (PPC)
PPC is a useful tool to help us understand economic choice
The production possibilities curve (PPC; also called the production possibilities frontier (PPF)) is a tool we can use to answer the basic economic question of what to produce, how much to produce, and the trade-offs involved if we adjust the production quantities of the goods to produce.
The PPC shows us what combinations of goods we can produce when we are using our resources efficiently. By efficient, we mean that no resources are unemployed and all of our resources are allocated to the production of the good that they are most suited to produce. More specifically, it has the following assumptions:
- Full employment – The economy is employing all of its available resources
- Fixed Resources – The quantity and quality of the factors of production are fixed
- Fixed technology – state of the technology is constant
- Only 2 goods – the economy is producing only 2 goods
All points lying on the PPC are efficient
The diagram is a PPC of an economy producing only two goods – tea and coffee.
- All points on PPC – A, B, C, D – are attainable & optimised for the economy. These combinations are considered efficient.
- Any points out of the curve (e.g. Y) are not attainable.
- Any points within the curve (e.g. X) are attainable but not efficient.
PPC embodies the concept of scarce resources and opportunity cost. To obtain more of one thing, one needs to forgo the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice. To get more of one good, we need to sacrifice another good. For instance, to grow more tea, the we need to sacrifice more coffee and vice versa. It is not possible to grow more of both crops with the current resources available.
Economic growth and expansion of the PPC
Although we are not able to grow more of both coffee and tea using the resources at that point in time. However, it is possible that over time, the resources in the economy may grow, making it possible to achieve output that were not possible before. Diagrammatically, this is equivalent to an expansion of the PPC outwards.
Economic growth can occur due to one or more of the following:
- an increase in the quantity of resources.
- an increase in the quality of existing resources.
- technological advancement in production.