AP® Macroeconomics · Unit 1 · Topic 1.2
The Production Possibilities Curve
The production possibilities curve shows every combination of two goods an economy can make with its current resources and technology, used fully and efficiently. Points on the curve show tradeoffs; points inside show waste.
Scarcity means a country has limited workers, machines, land, and time. If it wants more of one good, it has to pull resources away from making another good. The production possibilities curve, or PPC, draws this tradeoff. Put one good on each axis, say bread and steel. Every point on the curve is a maximum combination the economy can produce if it uses all its resources as efficiently as possible. To get more steel, workers and equipment shift away from bread, so bread output falls. That fall is the opportunity cost of the extra steel.
To build the curve, picture the extreme points first: all resources making bread, and all resources making steel. These are the two endpoints on the axes. In between, the economy can split resources between both goods, tracing a curve that usually bows outward from the origin, because resources are not equally good at producing both goods. Moving along the curve, each extra unit of one good costs more and more of the other, since the resources best suited to the first good get used up first and you're left pulling in less-suited resources.
Points matter by location. Any point on the curve is efficient, using every resource fully. A point inside the curve shows waste: idle factories, unemployed workers, resources sitting unused, not a shortage of resources. A point outside the curve is currently impossible, it would need more resources or better technology than the economy has. That is exactly why this topic leads into economic growth: more resources or better technology shifts the whole curve outward, while losing resources, like workers leaving the country, shifts it inward.
Key terms
- Production possibilities curve
- A graph showing the maximum combinations of two goods an economy can produce with fixed resources and technology.
- Opportunity cost
- The amount of one good given up to produce more of another good.
- Efficiency
- Using all available resources fully, represented by any point on the curve itself.
- Economic growth
- An outward shift of the entire curve caused by more resources or better technology.
Watch it explained
- How it worksWalk me through drawing a production possibilities curve for a country that makes only bread and steel.
- Worked exampleFind the opportunity cost of moving from 40 bread and 20 steel to 30 bread and 35 steel.
- Common mistakeWhy doesn't a point inside the frontier mean the country has run out of resources?
- Going furtherWhat happens to the frontier when half the workforce leaves the country?
Check yourself
End of topic.