Production Possibility Curve (PPC)

Production Possibility Curve (PPC)

There are alternative ways an economy can make use of its resources in producing goods and services. From Table 1 below, when resources and technology are fully used, Country X can produce combinations A to F. It can go for combination A (1000 barrels of crude oil, 0 bag of cocoa), B (800 barrels of crude oil, 300 bags of cocoa), C ( 500 barrels of crude oil, 600 bags of cocoa), D ( 300 barrels of crude oil, 700 bags of cocoa), E(100 barrels of crude oil, 780 bags of cocoa) and F ( 0 barrel of crude oil, 810 bags of cocoa).  


Table 1: Production Possibility Schedule for Country X

Combination

Crude oil (in barrels)

Cocoa (in bags)

A

1000

0

B

800

300

C

500

600

D

300

700

E

100

780

F

0

810


A curve is obtained after plotting all these combinations on a graph (see Figure 1 below). This curve is known as Production Possibility Curve (PPC).  A Production Possibility Curve shows the possible combinations of goods and services which an economy can produce when its resources and technology are fully used. The PPC is also called Production Possibility Frontier(PPF) or Production Possibility Boundary (PPB).


Figure 1: Production Possibility Curve of Country X

PPC diagram


The graph shows maximum utilisation of resources, underutilisation of resources, and unattainable combination.
From the graph, the economy has the capacity to produce the combinations on the curve (A to F). It is capable of producing more than combination G if only available resources are maximally utilised.  In other words, combination G is an indication that there is underutilisation of resources in Country X. At the moment, there are not enough resources and technology for the economy to produce combination H.


The Relationship between Production Possibility Curve and Opportunity Cost
A relationship exists between the PPC and opportunity cost (the alternative sacrificed or given up).  In fact, PPC enables the opportunity cost of moving from one combination to the other to be measured or calculated.  The table below shows the opportunity cost of moving from one combination to the other.  If the economy moves from A to B, 200 barrels of crude oil would have to be sacrificed to produce 300 bags of cocoa. Likewise, the movement from B to C shows that 300 barrels of crude oil are foregone to produce additional 300 bags of cocoa. If Country X goes from C to D, 200 barrels of crude oil will be forfeited to have extra 100 bags of cocoa. The opportunity cost of producing 80 more bags of cocoa from D to E is 200 barrels of crude oil. Finally, the country has to do without 100 barrels of crude oil in order to produce 810 bags of cocoa when moving from E to F.


Table 2:  Calculation of Opportunity Cost from the Production Possibility Schedule of Country X

Combination

Crude oil (in barrels)

Cocoa (in bags)

Opportunity Cost (barrels of crude oil sacrificed)

A

1000

0

 

B

800

300

200

C

500

600

300

D

300

700

200

E

100

780

200

F

0

810

100

 


Production Possibility Curve and Efficiency

An economy is said to be efficient when it obtains maximum output (goods and services produced) from its inputs (resources of land, labour, capital and enterprise).  Inefficiency means that less output is gotten from the resources used. It means that an economy that operates on the PPC is efficient as all existing resources are used in production. On the other hand,  a country that operates within the PPC is inefficient as some resources are not utilised. From Figure 1 above, points A, B, C, D, E and F depict efficiency while point G indicates inefficient use of resources.



The Shift of the Production Possibility Curve
The PPC is not static; it can shift inward or outward depending on changes to its resources or technological capability.  A positive change in the quantity or quality of resources will shift the PPC outward, thereby enabling the economy to produce more of the goods or services. For example, if Country X has more oil fields, labour (probably due to immigration) or capital, its PPC will shift outward as shown in Figure 2 below. The same movement will occur if the quality (not the quantity) of its resources is increased.  For example, technological advancement or education and training can improve the quality of resources, making the PPC  shift outward.


Figure 2: Outward Shift of the PPC

PPC diagram showing outward shift


A decrease in the amount or quality of the available resources will lead to an inward shift or movement of the PPC as shown in the diagram below. If there is depletion of its oil fields, Country X will produce less crude oil; its PP will shift inward. Also, if its workforce becomes less skillful, less output will be made in the country and its PPC will move inward.


Figure 3: Inward Shift of the PPC

PPC diagram showing inward shift