What does the production possibilities curve represent?
In the field of macroeconomics, the production possibility frontier (PPF) represents the point at which a country's economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible.
The production possibility frontier (PPF) is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The PPF assumes that all inputs are used efficiently.
- The Production Possibilities Curve (PPC) models a two-good economy by mapping production of one good on the x-axis and production of the other good on the y-axis. The combinations of outputs produced using the best technology and all available resources make up the PPC.
- The case for economic literacy is a strong one. Nations benefit from having an economically literate population because it improves the public's ability to comprehend and evaluate critical issues. This understanding is especially important in democracies that rely on the active support and involvement of its citizens.
- Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another.
A production possibilities curve PPC is an economic model that shows the production efficiency and allocation possibilities of the economy for a given level of resources. More specifically, it describes a society's trade-off between two goods or services or two types of goods and services.
- If the PPF is a straight line as shown in the first graph, then the slope is constant. This means the opportunity cost is also constant. In real life, the PPF will not be linear, it will be a downward sloping curve because of the law of diminishing marginal returns. That's why PPC slopes downward.
- Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth.
- For the economy as a whole, an improvement in technology shifts the production possibilities frontier outward. Production Possibility Frontier (PPF): An increase in technology that allows for greater output based upon the same inputs can be described as an outward shift of the PPF, as demonstrated in this figure.
The four key assumptions underlying production possibilities analysis are: (1) resources are used to produce one or both of only two goods, (2) the quantities of the resources do not change, (3) technology and production techniques do not change, and (4) resources are used in a technically efficient way.
- a typical PPC usually makes a bow out (or concave) shape from the original. This indicates an Increasing Opportunity Cost, meaning that the more you produce Item A, the Opportunity Cost of Item B increases, whereas in the linear graph it was constant.
- It is because resources like labor or capital must be relocated to produce weapons. Most of the PPF curves are concave due to the inadaptability of the resources. The law of increasing opportunity cost states: as the production of one good rises, the opportunity cost of producing that good increases.
- The slope of the PPF represents the opportunity cost of moving from one combination of goods to another. This means the opportunity cost is also CONSTANT. In real life, the PPF will NOT be linear; it will be a downward sloping curve because of the law of diminishing marginal returns.
Updated: 16th October 2019