Production Possibility Curve (PPC)

Assumptions in the PPC (AO2)

As with any economic model, the PPC is a simplified version of real economics, and has a few assumptions:

• Fixed resources: The quality and quantity of the country's resources are fixed in place. This also means the state of technology remains the same.

• Interchangeable resources: One can always give up one of the alternatives to gain more of the other alternative, at no other cost. 

• Only 2 alternatives: The PPC can only show the relationship between 2 resources, although the real economy is much more complicated.

Increasing vs. constant opportunity cost (AO2, AO4)

There are 2 main ways the PPC can be drawn, either with increasing or with constant opportunity cost:

[MISSINGdiagrams| PPC, increasing oppo, explanation; PPC, constant oppo, explanation]

Features of the model (AO2)

The PPC can be used to explain various economic concepts. 

• Opportunity cost: The PPC shows that choosing more of one good results in less of another.

• Scarcity: Not all combinations of resources can be produced simultaneously due to scarcity.

• Choice: Because of this scarcity, choices have to be made on where to position ourselves on the PPC.

• Unemployment of resources: Points inside the PPC indicate unemployment or inefficient use of resources, where the economy is not producing at its full potential.

• Efficiency: The PPC shows efficiency when production is on the curve, meaning resources are fully and effectively utilized.

• Actual growth vs. growth in production possibilities: 

  • • Actual growth is represented by a movement towards the PPC. This means the economy is actually growing.

    • Growth in production possibilities is shown by an outward shift of the PPC. The economy remains at its previous point, but it now has a larger potential for its future.

[MISSINGdiagrams| PPC, actual; PPC, potential]