A Level Economics
A Level Economics:
An Introduction to the Production Possibilities Curve
Notes from the video ‘Diffusion| A Level Economics |Introduction to Production Possibilities Curve‘:
What is a Production Possibilities Curve?
The Production Possibilities Curve (PPC) shows all the possible combinations of two goods that can be produced in the economy when resources are fully and efficiently employed, given the state of technology, assuming the economy can only produce the two goods.
That sounds like a lot to take in.
To make things clearer, we will illustrate this concept with an example.
Let me first introduce you to my friend, Tom. Tom is a hardworking farmer who owns a small plot of land which is equally suitable for planting oranges and apples.
On this plot of land, Tom can choose to plant only oranges, or only apples, in that case, he can plant a total of 200 oranges or 200 apples respectively. Or Tom could choose to plant both oranges and apples as long as the total number of apples and oranges is equal to 200.
Let’s say Tom chooses the third option and decides to grow 150 apples and 50 oranges this year.
Let’s examine what this choice means for Tom.
When Tom chose to plant the 150 apples, he gives up planting 150 oranges
And when he chose to plant the 50 oranges, he gives up planting 50 apples.
Now, what if Tom chose to plant 200 oranges instead?
In that case, he would have given up planting 200 apples instead.
You see, for any choice Tom takes, there is an opportunity cost.
If Tom chooses to plant an apple, he would have to give up the opportunity to plant an orange, and vice-versa.
As stated before, on this plot of land, Tom could have made various choices on the number of oranges and apples to plant.
So, we went ahead to create six choices Tom might have made.
If we were to plot them on the graph, it would look something like this.
This is the Production Possibilities Curve for oranges and apples Tom can plant in a year.
The red line represents the choices Tom have in choosing the number of oranges and apples he wishes to plant assuming he was using his resources efficiently.
There are several things we can learn from the graph:
First, opportunity cost is reflected by the negative slope of the Production Possibilities Curve. If Tom wishes to increase the output of one fruit, he has to decrease the output of another fruit.
For example, if we look at point B, for Tom to plant 40 apples, he needs to give up planting 40 oranges.
The points along the curve reflects the choices Tom can make in producing the oranges and apples if he utilises all his resources efficiently.
The blue area or the points inside the Production Possibilities Curve represents unemployment or underemployment of resources by Tom.
For example, at point U, Tom plants a total of 120 apples and oranges instead of 200 apples and oranges.
The reason why Tom is able to plant less apples could be because Tom isn’t fully utilising his machinery properly or he isn’t using efficient planting methods.
Scarcity is reflected by the yellow area, or the points outside the Production Possibilities Curve and are unattainable given the resources Tom has.
Scarcity is the problem of having seemingly unlimited human wants in a world with limited resources.
Tom may want to produce 400 apples and oranges, but he cannot do so due to a lack of resources, like the lack of money to purchase more seeds or his land may be too small to plant 400 apples and oranges.
In summary, we learnt that the Production Possibilities Curve can used to illustrate a few fundamental economic concepts:
Firstly, scarcity, or the problem of having seemingly unlimited human wants in a world with limited resources, is represented by points outside the curve.
Secondly, choice is represented by the set of points on the curve or inside the curve.
Opportunity cost is represented by negative slope of the curve.
Unemployment or the underutilisation or inefficient utilisation of resources which is shown by the points inside the curve.