A production-possibilities curve (or PP curve for short) is one of the simplest graphs in economics. A PP curve shows the relationship between output levels of two goods in an economy. It assumes the specified economy can only produce these two goods. In the real world of economics, this is highly unrealistic, but it allows us to better understand opportunity costs, trade-offs, and maximization/utilization. On each axis of the graph is the quantity of one specific good. The further from the origin, the higher quantity of the good produced. An example of a PP curve is shown below.
Understanding the Graph
Observe that at any point in the quadrant above, we are producing a specific amount of one good and a specific amount of the other good. The curved line in the graph represents the economy at maximum capacity (the economy is working at “full employment”) for the time. The curve stems from different production levels of each good based on technologies and efficiency of the workers producing the specific good. When less of one good is produced in order to produce more of the other good, the land, labor, and/or capital (factors of production) used to create the new good may not be able to produce this new good as efficiently as it could the good it did previously. We will use an example to clarify. Suppose an imaginary economy produces an equal amount of cars and televisions. The economy decides to begin producing fewer cars and more televisions, thus some car factories are now used as television factories. However, because these new television factories have car-manufacturing technology instead of television-manufacturing technology, they do not produce televisions as efficiently as they produced cars. Thus, the decrease in the amount of cars produced will be greater than the increase in the amount of televisions produced (due to inefficiency of factors of production), creating a curve on the graph at maximum capacity.
The space inside the curve represents an economy that is not operating at maximum capacity (e.g. one in a recession) and the space outside the curve is an unattainable point at the given time (economic growth is needed to achieve the point).
The slope is the opportunity cost at any given point. Read more about the PP Curve
Determinants of the PP Curve
The following factors affect the position of the PP curve in any given economy. Changes in these factors can shift the PP curve inward or outward. It is imperative to understand these determinants and how they affect the curve. Some examples of these shifts will be shown in the upcoming lessons.
· Size of the labor force – The more workers, the more goods that can be produced. An increase in the labor force leads to an outward shift of the PP curve. (A decrease consequently leads to an inward shift of the PP curve.)
· Quantity/quality of capital – The more capital available to produce goods, the more goods that can be produced. Also, when the quality of the capital improves, more goods can be produced. An increase in the quantity/quality of capital shifts the curve outward as more goods are produced. (Again, a decrease consequently leads to an inward shift of the PP curve.)
· Quantity/quality of resources – Similar to capital, more and better resources create more goods. An increase in the quantity/quality of resources shifts the curve outward. (Again, a decrease consequently leads to an inward shift of the PP curve.)
· Technology - Improved technology produces goods faster and more efficiently. Thus, more goods can be produced. Increases/improvements in technology shift the curve outward.
· Health – Healthier economies have more citizens in the work force as well as stronger workers. When the health of an economy increases, more goods can be produced, thus shifting the curve outward.
· Education – Smarter economies create faster, better ways of producing goods. This increases the amount of goods produced, leading to economic growth. With an increase in education, the PP curve shifts outward.