Production Possibility Curves

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    • 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

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