An Introduction to the PPC
- The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
- Any two goods/services can be used to demonstrate this model
- Many PPC diagrams show capital goods and consumer goods on the axes
- Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good
- Consumer goods are end products and have no future productive use. For example, a watch
A PPC for an economy demonstrating the use of its resources to produce capital or consumer goods
Diagram Explanation
- The use of PPC to depict the maximum productive potential of an economy
- The curve demonstrates the possible combinations of the maximum output this economy can produce using all of its resources (factors of production)
- At A, its resources are used to produce only consumer goods (300)
- At B, its resources are used to produce only capital goods (200)
- Points C and D both represent full (efficient) use of an economy's resources as these points fall on the curve. At C, 150 capital goods and 120 consumer goods are produced
- The use of PPC to depict opportunity cost
- To produce one more unit of capital goods, this economy must give up production of some units of consumer goods (limited resources)
- If this economy moves from point C (120, 150) to D (225, 100), the opportunity cost of producing an additional 105 units of consumer goods is 50 capital goods
- A movement in the PPC occurs when there is any change in the allocation of existing resources within an economy such as the movement from point C to D
- The use of PPC to depict efficiency, inefficiency, attainable and unattainable production
- Producing at any point on the curve represents productive efficiency
- Any point inside the curve represents inefficiency (point E)
- Using the current level of resources available, attainable production is any point on or inside the curve and any point outside the curve is unattainable (point F)