Production Possibilities Curve

1
Production Possibilities Curve

• PPC

2
PPC

• A Graphical representation showing the maximum
  quantity of goods and services that can be
  produced using limited resources to the fullest
  extent possible.

3
What can you make out of the resource of Rubber?

• Examples
• If a company can make shoes or tires
• If all resources of rubber are used for shoes the
  company can make 100 million pairs of shoes and 0
  tires and vice versa.

4
Production Possibilities for Production of
Economy Cars and Luxury Cars for an Economy

• Point Economy Cars Luxury Cars
• A 0 5
• B 2.8 4.2
• C 4.5 3
• D 6 1.5
• E 7 0
• F 5.1 4.9
• G 3 2

5

• The curve represents the maximum that can be
  produced.

6
Points on the Curve

• If production lies along a point along the PPC
  curve for those resources it is said to be
  efficient.
• Efficiency- The case in which a given level of
  inputs is used to produce the maximum output is
  produced at minimum cost.

7
Points Inside the Curve

• Points that lie within the PPC but are not on the
  curve represent either an unemployment of
  resources or production inefficiency
• Underutilization- If a point lies within the
  curve it indicates that the resources are being
  underutilized. This means that production is not
  being carried out to its fullest capacities

8
Points Outside the Curve

• This represents the use of more resources than
  are available. This is an impossible combination
  if everything else remains constant.

9
Shifts in the PPC Curve

• This is the real life situation.
• The PPC shifts all the time because all things do
  not remain constant.
• Resources get overused and new resources are
  found all the time.
• In this case a shift in the PPC will occur.
• If more resources are made available or
  discovered, the curve will shift to the right
  indicating a situation in which there is more
  production possible.
• The curve can also shift to the left indicating a
  loss of the availability of resources inciting
  less production.

10
Assumptions Underlying the PPC Curve

• Resources are fully employed
• We are looking at production over a specific time
  periodfor example one year
• The resource inputs, in both quantity and
  quality, are fixed over this time period.
• Technology does not change over this time period.

11
Economic Model

• Simplification of a more complicated idea,
  concept
• Not reality
• Representation to help us understand certain
  economic concepts
• Opportunity Cost
• Law of Increasing Opportunity Cost

12

• An economy producing at point G can produce more
  luxury cars by moving to point C
• This is possible because resources are not fully
  employed at point G or are not being used
  efficiently

13
Negative Slope and Opportunity Cost

• As we have seen points that lie on the PPC
  represent points of full resource employment and
  production efficiency.
• Society can choose only one point on the curve,
  because a societys choices are constrained by
  available resources and existing technology, when
  these resources are fully and efficiently
  employed, it can produce more luxury cars only by
  reducing production of economy cars.
• The opportunity cost of the additional luxury
  cars is the forgone production of economy cars

14
Negative Slope

• The fact that scarcity exists is illustrated by
  the negative slope of the PPC
• Slope ?y/ ?x (?change)
• ?yy2-y1
• ?xx2-x1

15
Negative Slope

• In moving from point E point B luxury production
  increases from 0 to 4.2 million a change of 4.2
  million which is a positive change, but the
  increase in luxury cars can only be made by
  decreasing production of economy cars.
• Thus when we move from E to B Economy production
  decreases from 7 to 2.8 million which is a
  negative change
• The slope of the curve, the ratio of the change
  in luxury to a change in economy is negative
• ?y/ ?x
• 2.8-7/4.2-0-1

• Point Economy Cars Luxury Cars
• A 0 5
• B 2.8 4.2
• C 4.5 3
• D 6 1.5
• E 7 0
• F 5.1 4.9
• G 3 2

16
Law of Increasing Opportunity Costs

• The negative slope of the PPC indicates the
  tradeoff that a society faces between two goals
• We can learn something further by the shape of
  the curve and the terms of this tradeoff

17
PPC for Corn and Wheat

• Point Total Corn Production Total Wheat
  Production
• A 700 100
• B 650 200
• C 510 380
• D 400 500
• E 300 550

18
PPC for Corn and Wheat
A
B
Total Corn Production (millions of bushels
annually)
C
D
E
Total Wheat Production (millions of bushels
annually)
19
Law of Increasing Opportunity Costs

• Suppose that societys demand for corn
  dramatically increases.
• If this happens, farmers would probably shift
  some of their land away from wheat.
• Such a shift would be represented by a move from
  C up to and left along the PPC towards A and B
• As this happens it becomes more and more
  difficult to produce more corn
• The best land for corn production was presumably
  already in corn and the best for wheat in wheat.
• As we try to produce more and more corn, the land
  is less and less well suited for that crop.
• As we try to produce more corn, more and more
  land is being taken away from wheat.
• We will be taking increasingly better wheat land.
  
• The opportunity cost of more corn, measured in
  terms of wheat, increases.

20
Law of Increasing Opportunity Costs

• Moving from E to D shows that we can get 100
  million bushels of corn (400-300) by sacrificing
  only 50 million bushels of wheat (550-500), we
  get 2 for 1.
• However, when we are already stretching the
  ability of the land to produce corn, it becomes
  more difficult to produce more and the
  opportunity cost increases.
• Moving from points B to A, we can only get 50
  million bushels of corn (700-650) by sacrificing
  100 million bushels of wheat (200-100)
• If the demand for wheat would increase and we
  were to move down and to the right along the PPC,
  it would become increasingly difficult to produce
  wheat and the opportunity cost of wheat in terms
  of corn would increase.
• This is an example of the law of increasing
  opportunity cost.

21
Economic Growth

• Is characterized by an increase in the total
  output of an economy.
• It occurs when a society acquires new resources
  or when society learns to produce more with
  existing resources.
• Improved productivity also comes from
  technological change and innovation, the
  discovery and application of new efficient
  production techniques.

22
Straight Line PPC

• Indicates a constant opportunity cost